How is My Credit Utilization Ratio Calculated ?March 23, 2017 at 9:00 am
A credit utilization ratio is a measurement that reflects the amount you owe on your credit cards versus the cards’ limits. When financing reports are taken into account, Islamic financing is just like everything else. A credit utilization ratio is a very significant number. Both FICO and VantageScore, both credit score providers, take this number and it is weighed heavily when calculating your score.
Because this is a ratio of how much you owe and your limit, you want this number to be as low as possible. Charging too much on your card, especially if your card has been maxed out, results in you being viewed as a higher credit risk. You want to avoid running up your cards because ultimately it will lead to a lower score. A lower score only comes with more consequences and leads to more distress on your financing and opportunities. Lower scores make qualifying for loans and mortgages harder and can increase your car payments, insurance policy, and more.
Your credit utilization ratio is calculated in two ways, the first being per-card utilization which is also called line-item utilization. This measures the limit you are using on each card. The second method is overall utilization which is also called aggregate utilization. This method takes into account all your cards and their limit. If you have trouble calculating it you can generally go on a financing website to have it calculated such as, NerdWallet.com.
Many people wonder which one is more important, a per-card or an overall ratio. But the truth is, both are equally significant because credit scores take both into account. This is because if you are a carrier of a maxed out credit card and you open a new card to help cancel out the negative effects of the maxed out card and keep the new cards balance at $0, the high utilization ratio on the maxed out card will still negatively impact your score.
It is recommended by experts to avoid using over 30% of the credit limit on any one card so that you can assure that your overall usage will automatically be taken care of.
There are several strategies to assure a positive credit utilization. The first being to check your balance at least once a week. That way you can assure that you are aware of where you stand. Another option is to set balance reports to receive a notification the closer you are getting to 30%. You can even set up to receive notifications when approaching a lower number, such as 20%, to assure you are not going over. A third and very useful strategy is to make several small payments throughout the month instead of making one large payment on the due date. A good landmark for this method is paying small payments each time you get paid, so that a paycheck could be you as a reminder. Lastly, another useful strategy is to ask your credit issuer for a higher credit limit but only if that does not result in you overspending because jumping to higher limit instantly lower your utilization ratio.