Have you ever wondered how the credit bureaus calculate a credit score? Well, keep wondering because they’re not going to tell you. They guard that secret like the Coca-Cola formula. While we may never know exactly how they calculate a credit score, we DO KNOW what type information they use, and how important it is. For more information on that, read our previous post: How is Your Credit Score Calculated? For this article, let’s talk about one element of the credit score calculation that you should know about… Credit Usage Ratio.
Also known as Credit Utilization Ratio, this is simply the amount of your available limit that you are using at any given time. It let’s the creditors and the credit bureaus know how dependent you are on your credit accounts.
How does your credit usage ratio affect your credit score? If your usage is high, then you may be seen as more risky, and creditors may not extend you a larger limit. However, they could have the same reaction if you use very little or none of your available limit. It’s about finding the right ratio that gives you the most favorable conditions and the best credit score. Be aware that this is not the only piece of information that the bureaus will use to calculate your credit score. The major factors are: payment history, amount owed, length of credit history, new credit, and types of credit in use. These are explained in the aforementioned blog post.
What is a good credit usage ratio? Less than 50% is recommended, but a utilization ratio around 35% is ideal.
How do you calculate your credit usage ratio? Check out this easy-to-follow video…