In personal finance, your credit score plays a major role. Creditors use it to measure your financial trustworthiness.
One key factor in your credit score is credit utilization. However, not everyone is familiar with the term.
Here's a quick breakdown of what a credit utilization ratio is and why you need to keep it low to have a good credit score.
The term represents the relationship between your balances and the total credit available to you across accounts.
Credit utilization ratio is the percentage of all your credit limits in use, as reported by the credit bureaus.
Formula: Total outstanding balances / total credit limits = credit utilization ratio. Multiply by 100 to get the percentage.
Credit scoring models reward you when you keep a low credit utilization ratio. This helps boost your score.
From a creditor's perspective, this ratio tells them how good you are at managing your existing credit cards.
This makes you a low-risk customer and allows you to get good deals on credit cards and other credit needs too.