Credit Utilization Rate 101: What You Need to Know
Updated: Feb 28
How familiar are you with credit utilization rates?
Credit utilization rate refers to the balances of your accounts against your credit limits. A low credit utilization rate can help improve your overall credit score, while a high one can hurt it.
If you're planning on taking on personal loans or even a mortgage, it's crucial that you understand how credit utilization rates work and the impact they have on your credit score.
To help you out, Mid-Town Finance Company Nashville shares some information on this:
How It Works
Credit utilization rate is a ratio expressed in percentages, which is measured by your balance against your credit limit. When you borrow money, your balance is the amount of money you owe. When you pay off your balance, your credit limit is the amount of money you can still borrow. So if you have $10,000 in available credit and only owe $5,000, your credit utilization is 50 percent. If you owe $10,000, your credit utilization rate is 100 percent.
How Credit Utilization Rates Affect Your Credit Score
Your credit score is an important component of your creditworthiness. The higher your credit score, the more financially responsible you are in the eyes of creditors. Your credit score is essentially a measure of your creditworthiness and is determined by calculating the information stored in your credit report.
Why Credit Utilization Matters for Lenders
Your credit utilization rate is also an important metric for lenders. It's important because it lets them see how much of your available credit you're regularly using. If your credit utilization rate is too high and you're using a large portion of your available credit, you may end up appearing as a risky borrower in their eyes. That's because if you were to miss a payment, you'd be left with a small amount of available credit and a high balance. That would likely cause you to default on your loan.
How You Can Calculate Credit Utilization Rate
The easiest way to calculate your credit utilization rate is to use an example. Let's say you have a $10,000 credit limit, and you owe $5,000. Your credit utilization rate would be 50 percent, which is $5,000/$10,000 or 0.5. If you owe $10,000, your credit utilization rate is 100 percent.
How Personal Loans Can Help Lower Credit Utilization Ratios
If you're already carrying a high credit utilization rate and looking to improve your credit score, you should consider getting a personal loan to pay off your existing debt. Personal loans typically have lower interest rates and terms that allow for your debt repayment in a shorter time frame. Additionally, a personal loan can help you to lower your overall credit utilization rate. For example, if you have a $5,000 credit limit, you can take out a personal loan and pay off your $5,000 debt. You'd then have a $0 balance and a $5,000 credit limit, reducing your credit utilization to 20 percent.
Credit utilization rate is a ratio that measures your credit balances against your credit limits. It's generally expressed as a percentage. If you have a high credit utilization rate, you're using a large portion of your available credit. That can hurt your credit score if you carry a high balance that you're struggling to pay off. It's important to understand your credit utilization rate and how taking out personal loans can help you improve yours.
We hope you find this post helpful. For more information on credit utilization or if you're planning on applying for personal loans, contact Mid-Town Finance Company Nashville today, and we'd be glad to help you! Mid-Town Finance offers various personal loan sizes so you’ll surely find one that suits your needs.