Credit Utilization Ratio
You sign up for a credit card on Spring Break in Cancun, Mexico. The credit card company gives you a towel and tells you that you have a credit limit of $500.
Let’s say that you go ahead and use $200 of that $500 credit line on the trip to Mexico. Which means that your credit utilization rate is 40%. This ratio is the amount of credit you are using divided by the total amount of credit that you have available to you.
Of course, this isn’t an equation for one credit card. For your personal number, you want to add up all of your lines of credit. Let’s say you have a credit card with a limit of $10,000 and you have a home equity line of credit worth $20,000. On the credit card, you have a balance of $3,000, and on the HELOC you have used $6,000. This means you have used $9,000 of credit on a total amount available of $30,000. You utilization ratio is $9,000/$30,000, or 30%.
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