We have created the credit utilization calculator to make it easier for you to check the usage of your credit limit as a whole. This tool is geared toward anyone using a credit card, especially for those who have more than one credit card. It matters for businesses in particular.
With this finance calculator, you will be able to easily examine credit utilization while managing your debt balance at the same time. This is very important to credit score. Keep reading to find out more about the credit utilization ratio and relevant details.
Credit Utilization Ratio: What Is It?
Before we go any further, let’s see what the credit utilization ratio is. This value is intended to determine how much credit is being used at a time. In fact, the credit utilization ratio is a measure of how much of your credit limit you are using. It can help you get a better idea of how much money you have borrowed from your credit card company versus the total available credit limit.
The credit utilization ratio can be calculated as follows: credit card balance/credit limit x 100%
This ratio is usually expressed as a percentage. For example, a credit card with a $10,000 limit and a $1,000 balance would have a 10% utilization ratio. We will explain the calculation in detail later.
The most common use for this measure is to determine whether or not you are carrying too much debt relative to the amount of available credit. A high utilization ratio can indicate that you might be overspending and that it might be time to cut back on your spending habits.
Keep in mind that the amount of money you can access through a credit card is limited. To calculate the credit utilization rate, you need to divide the value that’s already used by the total card limit. That is why you should monitor the loan balance. Read on to learn why it is important.
Why Is It Important to Know Your Credit Utilization Ratio?
What is the purpose of calculating and monitoring the credit card utilization rate? Check the following points to understand why it is useful or even beneficial for most businesses. There are a lot of good reasons for that as you can see below.
- Banks often consider the credit utilization ratio because it’s a vital value for them thanks to its ability to stay unchanged when a debt is paid off with another one. It offers adequate data when you’re transferring credit limits between credit cards or a line of credit (LOC). This is especially true when there are a lot of other lines available, so it can help avoid cash flow problems.
- In addition to the credit history and credit limits, credit card utilization is an important factor for banks when determining whether or not someone is able to pay off previous debts. To provide their clients with more money, they offer a variety of financial products such as credit cards, loans, and mortgages.
- The credit utilization rate can also aid you in managing the budget of your household. Be sure to check our monthly budget calculator. With this handy tool, you will be able to plan your expenses and savings more efficiently. When it comes to the credit utilization rate, it is important to keep track of the money coming in from all of your credit cards. This can help you get a better idea of your balance.
- Also, the credit utilization rate can help you find out whether you have sufficient credit lines. If not, you’ll need a larger limit. If you have high credit utilization, consider increasing the limit. This will make sure your cash flow is stable.
- When the credit utilization rate is at a low level for a long time, this indicates an excessively big credit limit. In order to improve your creditworthiness, strive to decrease this limit as much as possible. This is important because your credit score is affected by credit card utilization. Credit utilization from 1% to 30% is considered good, while everything above 50% is poor.
How to Calculate Credit Card Utilization Rate
Now that you know more about the credit card utilization rate, it is time to see how our calculator works. It’s based on this simple formula:
Credit Utilization = Money used / Credit Limit
You can also use this formula:
Credit utilization rate = Total credit used/Total credit limit
- Total credit used represents the sum of cash you use from all of your credits
- Total credit limit is obtained by summing all the credit limits.
If you want to calculate the remaining credit balance, use the following formula:
Credit Remaining = Credit Limit – Money Used
Example of Credit Utilization Calculation
Let’s suppose that there are 3 credit cards used in a household, each of which features a different limit.
- 1st Credit Card – $1,500 used from the limit of $5,000
- 2nd Credit Card – $1,000 used from the limit of $4,500
- 3rd Credit Card – $3,500 used from the limit of $6,500
In this example, the credit utilization ratio will be calculated as follows:
Total Credit Used = 1,500 + 1,000 + 3,500 = $6,000
Total Credit Limit = 5,000 + 4,500 + 6,500 = $16,000
Credit Utilization Rate = $6,000 / $16,000 = 37.50%
As you can see, the household uses 37.50 percent of the total credit lines. This amount is still considered to be safe because 62.50% of the total credit lines can be used in the future. Let’s check another example. We will assume that you want to calculate credit utilization for one credit card only. In this case, we will use the formula below:
Credit Utilization = Money used / Credit Limit
- Money used: $1,000
- Credit limit: $5,000
Credit Utilization = 1,000 / 5,000 = 0.2 or 20%
Credit Remaining = 5,000 – 1,000 = $4,000
Try to calculate it with your values. Put them in our calculator and compute the credit utilization in a matter of seconds!