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Wednesday, April 17, 2024

What Is the Ideal Credit Utilization Ratio?

Your credit utilization ratio is the ratio of how much of your available credit you have used. You don’t want a credit utilization ratio that’s on the high side. Ideally, you should keep it below 50%.

Read ahead to find out why.

Available Credit

A high credit utilization ratio means that you have used up the majority of your available credit. You won’t be able to borrow as much from your credit accounts in the future. This can put you in a tricky financial position.

Why? Credit is a useful safety net for financial emergencies. If you get hit with a surprise expense out of the blue and you don’t have enough savings to pay for it, you can use your credit accounts to help you handle it in a hurry. You can charge the expense to the account and then repay what you borrowed later on through your usual billing cycle.

But you can only use credit as a safety net when it’s available. If your credit accounts are carrying high balances, you might not have enough credit to pay for a surprise expense right away. You might have to look into alternative options for dealing with emergency expenses when you don’t have any savings. An option like a personal online loan could help you resolve the emergency and move forward.

Personal online loans should only be used when absolutely necessary. Only apply for them during emergencies. You shouldn’t apply for one when you need to manage everyday expenses like utility bills and groceries.

Trouble with Repayments

The higher your credit utilization ratio, the more trouble you are likely to have with making repayments. Since your account balances are higher, your monthly bill payments will be higher — especially when you take compounding interest into consideration. These steep bills will be more challenging to manage. You might not be able to pay them in full or on time, which will saddle you with late fees.

In the worst-case scenario, your inability to manage repayments could push your account balances to their very limits. You could use up all of your available credit and max out your accounts.

Credit Score Consequences

Your credit utilization ratio is one of the factors that goes into calculating your consumer credit score. The other factors are your credit mix, credit history, bill payment history and new credit.

A high credit utilization ratio can have a negative impact on your consumer credit score, giving you a lower number than you’d like. Why? A high credit utilization ratio makes you a riskier choice for lenders since you’re more likely to pay bills late or default on payments. On the other hand, a low credit utilization ratio indicates that you are likely to pay bills on time and in full.

Your consumer credit score can dramatically influence your personal finances. If your score is considered “bad,” these are some of the side effects you might face in the near future:

  • Higher interest rates with credit cards
  • Higher interest rates on loans
  • Higher premiums on insurance
  • Higher payments for cell phone plans
  • Security deposits for utilities
  • Difficulty getting approvals for rental apartments

The side effects don’t have to follow you forever. You can improve your consumer credit score over time. One simple way to do this is to lower your credit utilization ratio.

Keep your credit utilization under control. You don’t want your ratio to get too high!

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