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Credit utilization ratio

When prospective lenders look at your credit report, they will be interested in seeing how much of your available credit that is being utilized – especially for revolving unsecured credits.

 

Example:

  • Erica has a $1,000 credit limit on her VISA card and currently owes $400.
  • Mary has a $3,000 credit limit on her VISA card and currently owes $500.

 

To many lenders, Mary will be seen as having a higher creditworthiness even though she actually owes more money than Erica. That is because Erica’s credit utilization ratio is 40% while Mary’s is not even 17%.

 

Credit scores in the United States

If you are in the United States, an important cut-off point is 30% credit utilization ratio. If you go above this, it can have a negative impact on your credit score. A lot of people know that maxing out their credit cards is bad, but erroneously believe that using 50% of their available credit will have no negative impact on their credit score.

 

Credit scores in Europe

Europe countries are in general very generous when it comes to credit score, especially the Scandinavian countries. Your utilization ratio is not that important, but it’s very important that you have a registered income and that you don’t hade any down payment problems in your credit history. But even if you had, you will still be able to get your application approved with several credit companies and banks.

 

utilizationExample:

  • You have a VISA card with a $1,000 limit and owe $400 on it.
  • You have a MasterCard with a $700 limit and owe $175 on it.
  • Combined credit utilization ratio is $575 / $1,700 = 34%

 

In this situation, you are likely to see your credit score increase somewhat if you bring your credit utilization ratio down to below 30%. Ideally start by paying down the VISA card a bit, since your utilization ratio for that card is 40% while the utilization ratio for the MasterCard is just 25%.

Rule of thumb (not necessarily valid for all credit scores):

 

  • Credit card utilization ratio of 30% or more —> negative impact on credit score
  • Credit card utilization ratio of less than 30% but more than 10% —> no impact on credit score
  • Credit card utilization ratio of less than 10% —> positive impact on credit score

Based on the rule of thumb, keeping your credit card utilization ratio below 10% is recommended if you are striving to increase your credit score. If you are okay with simply maintaining your credit score, keeping the credit utilization ratio below 30% will normally be enough, provided that you don’t have any other credit-issues that you need to compensate for.

 

Of course, paying down debt is not the only way to decrease your credit card utilization ratio. Increasing your credit limit will have the same impact.

 

Example:

  • You have a VISA card with a $1,000 limit and owe $400 on it.
  • You have a MasterCard with a $700 limit and owe $175 on it.
  • Combined credit utilization ratio is $575 / $1,700 = 34%
  • You increase the VISA card limit to $2,000.
  • Your combined credit utilization ratio is now $575 / $2,700 = 21%. You have also managed to the get credit utilization ratio for the VISA to drop from a whopping 40% to just 20%.