Credit Utilization Ratios (CUR) – We used this term in an earlier article about credit scores and how they are calculated. The three major credit bureaus all factor in the amount of credit you have available and how much of that available credit you are utilizing or using. In most cases, this makes up about 30% of your total credit score so it is an important thing to keep up with.
To find out your credit utilization simply divide your credit card balance by your credit limit then multiply by 100. For example, if you have a total credit limit of $10,000 on all of your cards and your total balances on the cards are $1,000, you have a low CUR of 10%. This will increase your credit score and lenders will love you. If on the other hand, you have total balances of $8,000, you have a high CUR of 80%. This could not only hurt your credit score but lenders will be very leery of extending additional credit to you. In fact, having a CUR of greater than 30% can start to negatively affect your credit.
Also, be aware that car loans or a mortgages are calculated based your original loan. For example, if your original car loan was for $20,000 and your current balance is $10,000 then your CUR will be 50%, whereas if you owe $18,000 it will be 90%.
The credit bureaus tend to look at your CUR in two parts. First, it scores the credit utilization for each of your credit cards separately. Then, it calculates your overall credit utilization, that is, the total of all your credit card balances compared to your total credit limits. So before applying for more credit, get your balances as low as possible and allow yourself enough time for changes to be reflected in your credit score. Remember, creditors may not report changes immediately. ps!