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What is a healthy credit utilization ratio?

On Behalf of | Mar 6, 2021 | Bankruptcy

If you are struggling to pay your monthly bills, you may want to explore debt relief, such as a bankruptcy filing. A good way to gauge your financial well-being is to calculate your debt-to-income ratio. This ratio simply compares your monthly expenses with your gross monthly income. Your debt-to-income ratio is only one percentage you should know, however.

If you want a healthy credit score, which is necessary for securing financing and low interest rates, you should also determine your credit utilization ratio. This ratio compares how much credit you are currently using to how much you have available. Recently, financial experts have changed their thinking about what constitutes an ideal credit ratio for consumers who want excellent credit scores.

Calculating your credit utilization ratio

When it comes to your credit utilization ratio, it is not the dollar amounts of your debt or credit limit that matter. Instead, you must determine the percentage of credit you are using.

To calculate your credit utilization ratio, simply divide your credit limit by your outstanding balance. For example, if you are using $2,500 of your $5,000 available credit, your credit utilization ratio is 50%.

Achieving an optimal credit utilization ratio

If your goal is to have an excellent credit score, many financial advisors recommend keeping your credit utilization ratio at about 10%. They previously recommended having a utilization ratio under 30%. Therefore, if your credit utilization ratio is too high, you may want to work on lowering it.

You probably do not want to take your ratio to zero, though. After all, while the services that calculate personal credit scores are notoriously secretive, a 0% credit utilization ratio may result in a lower credit score.

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