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If you want to get your credit score under control this year, you should learn about your credit utilization ratio. This percentage gives you an at-a-glance evaluation of your overall credit health. Improving your utilization ratio will help you reduce your debt — and potentially add positive entries to your credit report.
What is Your Credit Utilization Ratio (CUR)?
Your CUR shows how much of your credit limit you use shown as a percent. You can calculate it quickly by dividing your balance by your limit and multiplying the product by 100.
Like any percentage, it can only fall between zero and 100. Where you fall on this scale tells you a lot about how you’ve used your accounts in the past.
- At zero, a CUR indicates you don’t have an outstanding balance; you either haven’t used your line of credit, or you’ve paid everything off.
- If you reach 100 that means you have drawn all the credit you have available; you won’t be able to make any more draws until you make a payment.
If your lender shares your payment history with the credit reporting bureaus, your CUR will play a role in your score. It’s one of the five major factors of your credit. The lower your CUR is, the more favourable its impact will be on your score.
The line of credit experts at Fora recommend you familiarize yourself with your CUR, even if your lenders don’t report your payment history. Calculating your CUR is a quick litmus test of your finances. A high CUR suggests you may be using your accounts too much and need to take action to reduce your reliance.
Financial advisors like Suze Orman recommend you never let your CUR rise above 30% — and to aim for below 10% whenever possible.
4 Ways to Improve Your CUR
Want to lower your CUR to a single digit? Follow these tips to get achieve it.
1. Use a Line of Credit in Emergencies
The less you use your line of credit, the easier it will be to manage your CUR. Focus on building an emergency fund, relying on your line of credit only when you have to.
2. Make More Than the Minimum
If you do have to dip into this account, sit down with your budget to learn how you can make more than the minimum. By increasing your payments, you will pay off more of your balance and reduce your CUR. Ideally, you only ever draw against this account with a plan to pay it off in full.
3. Request a Higher Limit
While working to pay off your balance, call your creditors to see if they’re willing to increase your limits.
Your CUR is a ratio that takes into account your balance and your limits. Lowering your balance is one way to reduce your CUR; raising your limits is, too. See it in action below:
Let’s say you have a $1,000 balance on a $5,000 account. This CUR is 20%. The same $1,000 balance on a $10,000 account amounts to a 10% CUR.
4. Calculate Your Ratio
Frequent monitoring is another great way to manage your CUR. It’s easy to lose track of spending if you don’t regularly check your statements. Calculating your CUR can put your spending into perspective, and this at-a-glance percentage may flag your attention.
As just one of five factors of your score, your CUR doesn’t show the whole picture. For the greatest impact on your score, learn all the factors that impact your credit while you follow these tips.