What is a Balance-To-Limit Ratio?
The balance-to-limit ratio is a comparison of the amount of credit being used to the total credit available to a borrower. This rate tells potential lenders how much debt someone is carrying and how much available credit they are using. The balance-to-limit ratio is also known as the credit utilization ratio, and is used in the calculation of credit scores. Having a low ratio both overall and on each card can improve your credit score.
- The balance-to-limit ratio measures the amount of credit being used compared to the total credit available to a borrower.
- The balance-to-limit ratio is important because it shows how carefully you manage your available credit.
Understanding the Balance-To-Limit Ratio
The balance-to-limit ratio is important because it shows how carefully you manage your available credit. Credit scoring companies consider this ratio when determining your credit score, and a low ratio is better for your score than a high ratio.
Amounts owed count for 30% of a credit score, so if someone plans to take out a loan in the near future, they will want to pay careful attention to their balance-to-limit ratio. Keeping balance-to-limit ratios below 30% on each card will help boost a credit score. For scoring purposes, it doesn't matter whether you pay your balance in full each month or carry a balance if you keep your balance-to-limit ratio score low on each card. The lower you keep the balance-to-limit ratio will help improve your overall credit score either way.
To improve one’s overall financial situation, it’s important to keep the balance-to-limit ratio low, but also to pay credit card balances in full and on time each month. That way, credit card interest and fees won’t eat into the money available to spend or save. Most wise investors consider net worth more important than a credit score.
Examples of Balance-to-Limit Ratios
For example, say someone only has one credit card with a $2,000 limit and a $200 balance. The balance-to-limit ratio is incredibly easy to calculate by dividing 200 by 2,000 to equal 0.10. In other words, this person is using 10% of their available credit.
If someone has several credit cards, the math is still simple. The balance-to-limit ratio is the sum of all the balances plus the sum of all credit limits divided by the total balance and total credit limit. For example, if card A has a $300 balance and a $1,000 limit, card B has a $400 balance and a $2,000 limit, and card C has a $600 balance and $3,000 limit, the balance total is $1,300, and the credit limit total is $6,000. To determine the balance-to-limit ratio, divide $1,300 by $6,000 to get 0.22 or 22%.