Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Credit Utilization Ratio

What it is:

The credit utilization ratio is a calculation comparing an individual's total debt balances to total available credit.

How it works (Example):

The credit utilization ratio is also referred to as the utilization ratio. It's used in determining part of an individual's credit score.

The formula for credit utilization ratio is:

Credit Utilization Ratio = (Total Debt Balance) / (Total Available Credit)

Let's say you have three credit cards. One has a credit limit of $500, another has a credit limit of $1,000 and the third has a credit limit of $2,000. Let's also assume you carry a debt balance on all three cards. The three card balances combine to $1,000.

Total Debt Balance = $1,000

Total Available Credit = $500 + $1,000 + $2,000 = $3,500

By plugging these two factors into the formula, we can find the credit utilization ratio:

Credit Utilization Ratio = ($1,000) / ($3,500) = .2857 = 28.57%

In this case, your credit utilization ratio is 28.57%. Looked at another way, this would mean that you are using 28.57% of your available credit limit.

Why it Matters:

Your credit utilization ratio tells potential lenders how much debt you are carrying and how much of your available credit you are using. The lower your credit utilization ratio, the more favorable it looks to lenders (and the higher your credit score) because it's more likely that you'll be able to make payments on your debt.

Someone with a high credit utilization ratio carries a lot of debt or is nearing their maximum credit limit, which looks risky to lenders because they may be less able to repay debt.

About 30% of your credit score is calculated using the credit utilization ratio, so if you're serious about raising your credit score, try to keep a low credit utilization ratio by paying off excessive debt.

[For more credit building tips, see 7 Steps to Perfect Credit]

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...