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What’s the Sweet Spot for Your Credit Utilization Ratio?

18th July 2023 Print

Quick — what is your credit utilization ratio? Most people don’t know this exact number off the tops of their heads. Some don’t even know what this ratio means! 

If you’ve never heard of this term before, it might come as a shock that you have one. But it’s true — anyone who owns a credit card or line of credit will have this ratio. It’s an important metric of your financial health that reveals how much of your revolving credit accounts you use compared to their available limits. 

As a ratio, your utilization ratio will always be a percentage. But don’t let your school days mislead you — this is one score you don’t want to reach 100%. So, what mark do you want? Let’s find out what the sweet spot is for this important ratio. 

What is a CUR & How to Calculate Yours

Your CUR only applies to revolving accounts like lines of credit and credit cards. That’s because it needs two things that the typical personal loan doesn’t: a balance and a limit. 

Your CUR shows how much of your emergency line of credit limit you are using as a percentage of your available limit. For example, if you have a $2,000 balance with an account limit of $5,000, your CUR would be 40%. 

In this example, we divided your balance by your limit, then multiplied the product by 100. However, you can calculate your overall CUR for your entire loan profile. You just need to add up all your outstanding balances, then separately add up all the maximum limits of these accounts. You can sub these totals into the calculation shared above, dividing the sum of balances by the sum of limits. 

Why is Your CUR Important?

Your CUR is one of the five factors of your credit score. If your lender shares your payment history with one of the major credit bureaus, your CUR will play a role in the score you earn. 

It’s still an important number to know, even if your lender doesn’t share your payment history. It’s a quick stat that shows the health of your accounts. 

You can tell from a high percentage that you rely on your line of credit a lot. This habit could indicate you’re under some financial stress or aren’t budgeting properly. A low CUR, on the other hand, could suggest you have things under control and are less likely to fall behind on bills. 

What Percentage Should You Aim For?

Earlier in this article, you learned that a high percentage is not something you want. If your CUR is at 100%, it means you’ve maxed out your account. While this isn’t immediately a disaster, it raises a red flag. Regularly maxing out your accounts increases the amount of interest you pay and can significantly lower your score.

If 100% is bad, is 0% good? While zero might be the better option, it still isn’t ideal. If you regularly keep your ratio at 0%, there’s a good chance you aren’t using this account. As a result, it doesn’t tell lenders much about your borrower habits.

Instead, financial advisors say you should aim for a CUR of 1–10%. If that’s too much to ask for, you should try never to go over 30%.

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