The Debt-to-Available Credit Ratio, often called credit utilization, is a key financial metric representing the percentage of revolving credit you are using compared to the total credit available to you. This ratio influences how lenders and credit scoring models view your creditworthiness.
How to Calculate Your Debt-to-Available Credit Ratio
To calculate this ratio, add up your total outstanding balances on all revolving credit accounts such as credit cards, lines of credit, and home equity lines of credit (HELOCs). Then, sum the credit limits of these accounts. Divide your total balances by your total available credit and multiply by 100 to get a percentage:
(Total Balances / Total Available Credit) x 100 = Debt-to-Available Credit Ratio (%)
For example, if you have two credit cards with a combined balance of $2,500 and total credit limits of $8,000, your utilization ratio is 31.25%.
Why the Ratio Is Important
This ratio is a critical factor in credit scoring models like FICO, accounting for about 30% of your credit score calculation. A low ratio suggests you are using credit responsibly, while a high ratio can indicate financial strain and increase your risk profile in lenders’ eyes. High utilization may lead to loan denials or higher interest rates.
Recommended Utilization Guidelines
- Below 30% is considered good and supports a healthy credit score.
- Below 10% is excellent and often associated with top-tier credit scores.
- Above 30% can negatively affect your score.
- Above 50% signals high credit risk and can cause significant score drops.
Additionally, it’s essential to monitor utilization on individual credit cards, not just overall, because maxing out one card can harm your credit.
Tips to Improve Your Debt-to-Available Credit Ratio
- Pay down balances aggressively, focusing first on cards with the highest utilization.
- Make multiple payments each month to reduce reported balances.
- Request a credit limit increase cautiously to lower utilization without increasing debt.
- Avoid closing old credit accounts as this reduces your total available credit.
- Consider becoming an authorized user on a trusted family member’s account with good credit.
Clearing Common Misconceptions
- You do not need to carry a balance to build credit; paying off in full monthly is best.
- Closing credit cards often harms your utilization ratio and credit score.
- Credit reports may update at different times; maintain consistently low balances.
- Maxing out a single card can negatively impact your score, even if overall utilization is low.
Related Resources
For more details on how credit utilization fits into credit scoring and managing credit responsibly, see FinHelp articles on Credit Utilization Ratio and Factors Affecting Credit Score.
Authoritative Source
For official guidance, visit the Consumer Financial Protection Bureau’s explanation of credit utilization: CFPB Credit Utilization.