The Importance of Keeping a Low Credit Utilization Ratio

The Importance of Keeping a Low Credit Utilization Ratio
Fiona Staff1/29/2020

When dealing with credit cards, there’s a lot of numbers and figures to keep in mind. One important number to keep track of is the credit utilization ratio, which is the percentage of a cardholder’s total revolving debt (or credit balance) on all of their active credit card accounts, in comparison to their total available credit. For example, if someone has one credit card with a $1,000 limit and a balance of $100, they have a credit utilization ratio of 10%.

Ideally, no matter how many lines of credit a consumer has, their credit utilization ratio should not exceed 30%. This is typically the industry threshold for responsible credit card use, and exceeding the mark can have a negative effect on the cardholder’s credit score. And since a poor credit score can affect your ability to apply for new cards, keeping a low ratio is vital when it comes to building up credit.

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Fortunately, there are ways to lower a credit utilization ratio, beyond the obvious. Below are three methods to consider based on your financial situation. 

Pay Down Debt

As the balance on a credit card account decreases, so goes the credit utilization ratio. For example, if a consumer pays $50 of a $100 balance, with a $1,000 credit limit, the credit utilization ratio drops from 10% to 5%.

Increase Credit Line

When a credit limit is increased, the credit utilization ratio will decrease as a direct result. Let’s use our example of a $100 balance on a $1,000 credit limit. If the credit line is increased to $2,000, with the same $100 balance, the credit utilization drops from 10%  to 5%.

To increase a line of credit, a consumer must contact their card issuer to explore available options. The higher the credit score, the better chance an increase will be granted. 

Open Another Card

Ever hear it’s a bad idea to close a credit card account? One of the main reasons behind that is by closing the account, you’re eliminating a line of credit from your total available credit, which in turn boosts your credit utilization ratio if you have any unpaid balance.

Conversely, adding a new card with a new credit line will decrease your credit utilization ratio. If a consumer opens a second card with a limit of $1,000, in addition to their existing $1,000 limit card, their credit utilization ratio will drop based on the total balance, due to the increase in total available credit.

Bottom Line

Many consumers want more control of their financial circumstances. Part of that is knowing and understanding the importance of a credit utilization ratio and how responsible card use can lead to an improved credit score and more revolving credit. If you’re interested in a new credit card for this reason, Fiona’s search engine is a great way to get matched with personalized offers.

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