How credit utilization ratio affects credit score

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In personal finance, your credit score plays a major role. Creditors use it to measure your financial trustworthiness.

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One key factor in your credit score is credit utilization. However, not everyone is familiar with the term.

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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.

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The term represents the relationship between your balances and the total credit available to you across accounts.

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Credit utilization ratio is the percentage of all your credit limits in use, as reported by the credit bureaus.

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Formula: Total outstanding balances / total credit limits = credit utilization ratio. Multiply by 100 to get the percentage.

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Credit scoring models reward you when you keep a low credit utilization ratio. This helps boost your score.

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From a creditor's perspective, this ratio tells them how good you are at managing your existing credit cards.

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This makes you a low-risk customer and allows you to get good deals on credit cards and other credit needs too.

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