How To Calculate Credit Utilization Ratio?

Credit utilization ratio is a metric that measures the amount of credit a person is using compared to the amount of credit available to them. It is expressed as a percentage and is an important factor in determining a person’s credit score. A high credit utilization ratio indicates that a person is heavily relying on credit and may be perceived as a higher credit risk, while a low credit utilization ratio signals that a person is using credit responsibly and is a lower credit risk. Lenders and credit bureaus take into account a person’s credit utilization ratio when evaluating their creditworthiness, so it’s important to understand how to calculate it and keep it in a healthy range.

To calculate the credit utilization ratio, you can follow these steps:

Determine your credit limit: 

The first step in calculating your credit utilization ratio is to determine the total amount of credit available to you. This information can typically be found on your credit card statement or by contacting your credit card issuer.

Calculate your outstanding balance: 

The next step is to determine your outstanding balance, or the amount you owe on your credit card. This information can also be found on your credit card statement.

Divide your outstanding balance by your credit limit: 

To calculate your credit utilization ratio, divide your outstanding balance by your credit limit. This will give you a decimal number that represents your credit utilization ratio as a percentage.

Convert to a percentage: 

To convert the decimal number obtained in step 3 to a percentage, simply multiply it by 100.

For example, if your outstanding balance is Rs. 10,000 and your credit limit is Rs. 50,000, your credit utilization ratio would be calculated as follows:

• 10,000 ÷ 50,000 = 0.2
• 0.2 x 100 = 20%
• So, in this example, your credit utilization ratio would be 20%.

Compare to the recommended credit utilization ratio: 

It’s generally recommended to keep your credit utilization ratio below 30%, although some experts suggest keeping it below 10%. So, you can compare your credit utilization ratio to this benchmark to determine if it’s in a healthy range or if you need to take steps to lower it.

It’s important to keep your credit utilization ratio low because a high ratio can signal to lenders that you’re overextended and may not be able to repay your debts, which can negatively impact your credit score.

Bottom line:

To calculate your credit utilization ratio, divide the total amount of credit you’re using (such as your outstanding balances on credit cards) by the total amount of credit available to you (such as your credit limits on those same cards). Then, multiply the result by 100 to express it as a percentage. It’s recommended to keep your credit utilization ratio below 30% for the best impact on your credit score, so try to aim for a ratio that falls within this range. By keeping your credit utilization low, you can demonstrate to lenders and credit bureaus that you’re a responsible credit user and can help improve your credit score over time.