The amount you owe, or your credit utilization ratio, does affect your credit score.
What is Credit Utilization Ratio?
Your credit utilization ratio is the percentage of your available credit you are currently using. For example, if you have a credit card with a $1,000 limit and you have a balance of $500, your credit utilization ratio is 50%.
How Credit Utilization Affects Your Score
Lenders use your credit utilization ratio to assess your financial responsibility. A high credit utilization ratio can indicate that you are heavily reliant on credit and may be at risk of defaulting on your loans. This can negatively impact your credit score.
Ideal Credit Utilization Ratio
Ideally, you should aim to keep your credit utilization ratio below 30%. This means that you should use no more than 30% of your available credit. However, keeping it below 10% is even better.
How to Improve Your Credit Utilization Ratio
- Pay down your credit card balances: Paying down your balances will lower your credit utilization ratio.
- Request a credit limit increase: If your credit limit is increased, your credit utilization ratio will decrease.
- Avoid opening new credit accounts: Opening new credit accounts can lower your average credit age and increase your credit utilization ratio.
By managing your credit utilization ratio, you can maintain a healthy credit score and improve your chances of getting approved for loans and credit cards with favorable terms.
