Credit utilization ratio is a crucial factor in determining your credit score. It represents the percentage of your available credit that you are currently using. Keeping this ratio low can help maintain a strong credit profile.
Credit utilization ratio is calculated by dividing your total outstanding credit card balances by your total available credit limit. A lower utilization ratio indicates responsible credit use and positively impacts your credit score.
Lenders use the credit utilization ratio to assess how well you manage your credit. High utilization can indicate financial strain, whereas low utilization suggests responsible borrowing habits.
The formula to calculate credit utilization is:
(Total Credit Card Balances ÷ Total Credit Limit) × 100 = Credit Utilization Ratio
For example, if you have a total credit limit of $10,000 and your current balance is $2,000, your utilization ratio is 20%.
Financial experts recommend keeping your credit utilization below 30% for a healthy credit score. Ideally, staying under 10% can maximize your creditworthiness.
Maintaining a low credit utilization ratio is essential for financial health. By understanding and managing this ratio effectively, you can improve your credit score and increase your chances of securing better loan terms.
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