Your credit utilization ratio might seem like a complicated financial issue, but don’t let its name fool you. Once you get past its technical name, it’s really quite simple. As a measure of how much credit you use, your credit utilization ratio (CUR) is an important metric that reflects your financial health. The lower it is, the better shape your finances are likely in.
Once you understand all the nitty-gritty — like how it works and how to calculate it — you can take matters into your hands and lower your CUR.
What is Your Utilization Ratio?
Your utilization ratio — or utilization rate, as it’s sometimes called — is intimately tied to your outstanding balance. That’s because it shows the amount you use compared to the amount you have available.
By virtue of being a ratio, your CUR is commonly expressed as a percentage. So, if you have a balance of $3,000 on a $5,000 line of credit, your CUR would be 60%.
How did we get there?
The calculation to find out your CUR is simple. All you have to do is divide your balance by your limit, then multiply it by 100.
What is a Good CUR?
When it comes to your CUR, you do not want to earn a 100%. This indicates you’ve maxed out your line of credit.
A lender like Fora warns against a 100% CUR for several reasons:
- Maxing out your account means you can’t withdraw any more funds until you repay what you owe. This may leave you vulnerable to unexpected expenses that come along the way.
- Depending on the size of your account, your max may be a lot of money that you can’t repay all at once. Carrying over a balance may accrue more interest than if you paid it in full.
- You may also damage your credit score if your lenders report your account information to the credit bureaus.
Whether you hold an account with Fora Credit or another line of credit lender, you should always aim to keep your CUR low. But how low is low enough? It depends on who you ask.
Some financial advisors say your CUR should never exceed 30%. Thirty leaves the majority of your limit available in an emergency. Meanwhile, going beyond this number could have a negative impact on your score, provided your payment history gets shared.
However, other advisors recommend keeping your CUR between 0–9%. It shows your finances are in a good position, so you don’t need to rely on these accounts often, and when you do, you can pay them off in full.
How to Lower Your CUR?
Lowering your CUR relies on two things: reducing your balance and increasing your limits. Call your lender to see if they’re willing to give you a bigger limit. They may only do this if you have a long history of paying on time.
Next, get your budget in order. Rearrange your spending so you always pay more than the minimum. In fact, you should try to pay as much of your balance whenever possible.
A budget can also help you decrease your spending and prioritize savings. This way, you don’t have to rely on your line of credit as often.
Now that you know all the ins and outs of your CUR, it’s not so complicated anymore. Use what you learned here today to improve this rating.
