How does a credit card affect my credit utilization ratio?

by columbus_cummerata , in category: Banking and Credit , 9 months ago

How does a credit card affect my credit utilization ratio?

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1 answer

by althea_dooley , 9 months ago


A credit card can have a significant impact on your credit utilization ratio, which is the percentage of your available credit that you are currently using. Here's how it works:

  1. Available Credit: Your credit card comes with a predetermined credit limit, which represents the maximum amount you can borrow. This available credit contributes to your overall credit limit.
  2. Credit Card Balance: The balance on your credit card is the total amount you owe to the credit card company for purchases, cash advances, or balance transfers. This balance affects your credit utilization ratio.
  3. Credit Utilization Ratio Calculation: To calculate your credit utilization ratio, divide your credit card balance by your credit limit, then multiply by 100 to get a percentage. For example, if you have a credit card balance of $1,000 and a credit limit of $5,000, your credit utilization ratio would be 20% ($1,000 ÷ $5,000 * 100).
  4. Impact on Credit Score: The lower your credit utilization ratio, the better it is for your credit score. Lenders prefer to see low credit utilization ratios as it indicates responsible credit usage and a lower risk of defaulting on payments.
  5. Recommended Credit Utilization Ratio: It is generally recommended to maintain a credit utilization ratio below 30%. However, the lower the ratio, the better it reflects on your credit score. Keeping it below 10% is ideal, if possible.
  6. Regular Payments: If you consistently make on-time payments and keep your credit card balance low, your credit utilization ratio will remain low. This responsible credit behavior can positively impact your credit score.
  7. High Credit Utilization: If you have a high credit utilization ratio, it can be viewed as a sign that you are heavily reliant on credit and may have difficulty managing additional debt, which can negatively affect your credit score.

To summarize, having a credit card can impact your credit utilization ratio depending on your credit card balance and credit limit. Maintaining a low credit utilization ratio by keeping your balance low relative to your credit limit can have a positive impact on your credit score.