Your credit utilization ratio can greatly affect your credit score and drop it by a few points if you are maxing out your card. We’ll go over the details of your credit utilization ratio and how long it takes to adjust and reset in this article. Keep reading for more information about your credit utilization.

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Credit Utilization Ratio
First of all, the credit utilization ratio is a percentage of the amount of debt you owe divided by your total credit limit. Suppose you have a credit card with a credit limit of $5,000. If you have an outstanding balance of $2,500 that is due, your credit utilization ratio is 50%. You want to keep your credit utilization ratio under 20%. For this particular example, you would only want to charge a maximum of $1,000 on this card and be sure to pay it off in full every month. Never keep a revolving balance of more than 20% on any one of your credit cards. The best case scenario is if you pay off your credit cards in full each and every month and keep the credit utilization at or around 10-15%. By paying your bills on time and in full without carrying a debt, and also by keeping your credit utilization ratio low you will maximize your credit score and see increases as you keep doing this. Time is on your side and if you maintain this level of consistency, your credit score will grow and easily will be in the 700 range. Keep in mind that your credit score can range from 300 to 850, with the higher the number the better. Anything from 700 and up is considered to be excellent. Now we will look at the different ways of looking at your credit utilization ratio.

Be sure to get your credit score to see your true credit utilization ratio.

There are three ways or perspectives you need to look at when analyzing your credit utilization ratio. The first example we covered above which was to look at each individual credit card. There are two more important ways to analyze your credit utilization. The second way is to look at your total credit utilization across all accounts. Pretend that you have a mixture of 10 credit cards with a total credit limit of $30,000. On any given month, you charge $6,000 on all your cards spread out with each different card. Your total credit utilization is 20% which is fairly good. You are on the border of the 20% range so any attempt to lower your ratio would be good. You can either spend less on all cards or try and get a credit limit increase and do not increase your spend. A credit limit increase allows you to expand your total credit limit and thus reduce your credit utilization rate.

The third and final way to look at your credit utilization rate is to look at the usage of all your credit cards and if you carry a balance on them. Let’s go back to the previous example where you had 10 credit cards being used. This looks at if you are using all your cards or just one or two at a time. It would be best to rotate your cards and use 1-2 cards each month. So if you use 3 cards out of your 10 cards, your ratio would be 30% which isn’t bad when looking at your overall usage.

When you need to reset your credit utilization, just don’t use your cards for 2 months. That will clear any utilization rate on your accounts. So if you are applying for a new loan in 2 months from now, be sure to stop using your cards right now so it gives it a whole two months to reset your credit utilization rate. This is a trick that many people do to reach the highest credit score possible before applying for their mortgage or home loan.

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