You know that a good credit score is key to getting approved for loans and credit products. But what exactly determines your credit score?
It’s decided by a handful of factors, all reflective of your spending habits. One of the biggest is your credit utilization ratio.
“Your credit utilization ratio is the amount of available credit that you use, from your credit card to a line of credit. Essentially, it refers to all the available credit you have, and how much of it you spend,” says Joshua Harz, Personal Banking Manager at Cambrian.
We sat down with Joshua to find out how your credit utilization ratio affects your overall credit score:
“A low credit utilization ratio is associated with having a higher credit score. Conversely, having a high credit utilization ratio can lower your credit score,” says Joshua.
Try to keep your credit utilization low to keep your credit score high!
“A good credit score can improve your chances of getting approved for a loan, mortgage, or credit card. It shows financial institutions that you are responsible with your credit. You may be offered pre-approved limit increases on credit products, and you could get better interest rates on loans and mortgages.”
How to calculate your credit utilization ratio
Divide your balance by your total available credit.
If you have a balance of $2,500 on your credit card, and your credit limit is $5,000, your credit utilization ratio is 50%.
If you have a balance of $3,000 on your credit card, and your credit limit is $10,000, your credit utilization ratio is 30%.
Keep in mind that your credit utilization ratio will factor in your balance on all sources of revolving credit, including other credit cards or lines of credit you may have.
“Try not to use all of your available credit at once. Ideally, you want to use less than 30% of the credit you have. Using more can have a negative impact on your credit score,” says Joshua.
“There are a couple of ways to lower your credit card utilization ratio. The best way would be to decrease your outstanding debt by making frequent payments on your credit cards, lines of credit, or paying these items off monthly,” says Joshua.
“For the best credit utilization ratio, start by paying off your credit card, line of credit, or other debt.”
“If you’re confident you can manage your credit responsibly, you could apply for a credit limit increase to lower your utilization ratio.“
“However, if you tend to over-spend, you may want to lower the limit on your credit cards to discourage that behaviour.”
“There are many important factors that can impact your credit score. Think of your credit score as a pie,” says Joshua.
“Your credit utilization ratio is one piece of that pie. Other pieces include how long your account has been open, number of applications for new credit, and payment history.”
“Some pieces are bigger than others and have a greater impact on your credit score. Manage each piece responsibly to have a great score!”
“As Cambrian Advisors, it’s our mission to provide our members with sound financial advice,” says Joshua.
“By working together with our members, we provide personalized advice on how to use credit products responsibly. We can suggest changes that have a positive impact on your credit score, such as debt consolidation, budgeting, automatic bill payments, and more.”
Our team of dedicated advisors are here to help, whether you prefer to meet via video, phone, or in-person at a branch. Book a meeting today!
We would be happy to discuss your unique situation with you.
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