What is a credit utilization ratio?

by marion.bernhard , in category: Banking and Credit , 10 months ago

What is a credit utilization ratio?

Facebook Twitter LinkedIn Telegram Whatsapp

1 answer

by cedrick.casper , 9 months ago


Credit utilization ratio is a measure of how much of your available credit you are using at a given time. It is calculated by dividing your total outstanding credit card balances by your total credit card limits.

For example, if you have a credit card with a limit of $10,000 and your outstanding balance is $5,000, your credit utilization ratio would be 50% ($5,000 divided by $10,000).

Lenders consider credit utilization ratio as an important factor when assessing creditworthiness. A lower ratio, generally below 30%, is considered favorable as it indicates responsible credit management and the ability to manage debt effectively. A higher ratio, on the other hand, may be seen as a potential risk, suggesting a higher likelihood of defaulting on payments.