Credit cards are a great way to build credit, but you can quickly find yourself in trouble if you aren’t careful. A high utilization rate can make it look like you’re using more money than you have and put your credit score at risk. To avoid this problem, here’s how to calculate your credit card utilization rate and what impact high or low usage can have on your financial health:
What is credit utilization?
According to experts, SoFi, Your credit utilization ratio is a fancy way of referring to how much of your credit you’re using. It’s also called your credit utilization ratio. Credit card companies use this number to determine whether or not you’re a good or bad risk—and your credit score reflects that. If they see that you’re consistently maxing out your cards and paying off the balances only when they become due, they’ll think twice before extending more credit to you in the future.
Best Way to Calculate Credit Card Utilization Rate
Credit utilization is the amount of your credit limit that you use—in other words, it’s the percentage of the total funds available to you that are being borrowed. Your credit utilization rate is calculated by dividing your outstanding balance by your overall limit. You can see how much credit card companies care about this figure when they offer reward cards with low-interest rates and other perks in exchange for high utilization rates.
The lower your credit score (and thus, the higher your utilization) gets, the more likely it is that you’ll be denied applications or charged more when applying for new ones. Suppose this happens while using multiple cards at once.
Can you calculate your individual credit utilization for each card?
It is possible to calculate your individual credit utilization for each card. For example, you’ll need bank statements and a calculator or spreadsheet.
To do it:
- List your cards by the amount owed and the minimum payment due.
- Add up all of the balances on these cards.
- Divide that total by the total amount of available credit across all accounts. The result will be how much you’ve borrowed against each account individually—and this information could help determine which accounts are riskier than others if you have to close them due to financial issues or personal preference.
When does credit utilization affect your credit score?
When you use a credit card, your credit utilization is the amount of your balance compared to the amount of available credit. Credit card issuers look at this ratio when they decide whether or not to extend you more credit and calculate your overall score.
If you have a high utilization rate, it means that you are using more of your available credit than most people in your peer group. For example, a high utilization rate might indicate that you spend too much on interest payments and other fees instead of paying down debt over time. However, if you have a low utilization rate, there aren’t many opportunities for growth in terms of new lines or rewards points with which to increase your overall score.
With all of these tips, you should be able to better calculate your credit card utilization rate. It’s a simple formula that can help you determine how much more you could spend before going into debt on your credit card.
