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What Is A Utilization Ratio And What Should It Be?
A Utilization Ratio is the ratio that is found by comparing your entire credit card balances with your entire credit limits. If that doesn’t make sense yet, keep reading. Imagine that all of your credit cards combined have a credit limit of $30,000. If you use your cards and add the balance of each one together, you have a combined balance of $3,000. This would give you a utilization ratio of 10%. If, by chance, your combined balance was only $300, then your utilization ratio is only 1%.
What value should you be striving for? Well, it’s a subject that many people debate, and few can give absolute proof on a certain number. What is generally agreed, however, is that it should stay between 1% - 10%. This means that your credit card balances help your credit out the most when they remain between those numbers.
Now, you’re probably wondering how having a balance of 1% is better than having a balance of 0%. To be honest, credit card companies don’t care to extend credit to people who don’t use the credit cards. In fact, if you monitor your credit score, you’ll probably notice that it drops in the month after you pay off all of your cards. Then, the next month if you carry a balance, you’ll notice that it may jump back up a few points.
Your credit score is a way to determine how well you manage credit, and your credit risk. If you never use your cards, or pay them in full every month then people don’t have any incentive to give you more credit, and they can’t accurately determine how well you manage it when you are actually using it. The banks are in it to earn money, and you’re not giving them any, so they look past you and onto the next person. If you aren’t comfortable with carrying a balance, then by all means, pay it off and continue with your routine. If you are comfortable with carrying a balance, then keep it low, and consistent.
In the end, you should notice your score rising little by little because of this. No, it’s not a quick increase like you might be hoping for, but it’s a small piece in a very large puzzle.
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