DEFINITION of 'Balance-To-Limit Ratio'

The amount of money you owe on your credit cards compared to your credit limit. The balance-to-limit ratio is also called your credit utilization ratio. This ratio is important because it shows how carefully you’re managing 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.

BREAKING DOWN 'Balance-To-Limit Ratio'

If you only have one credit card with a $2,000 limit and a $200 balance, your balance-to-limit ratio is incredibly easy to calculate: $200 / $2,000 = 0.10. In other words, you’re using 10% of your available credit.

If you have several credit cards, the math is still easy. Just add together all of your balances and all of your credit limits, then divide your total balance by your total credit limit. For example, if card 1 has a $300 balance and a $1,000 limit, card 2 has a $400 balance and a $2,000 limit, and card 3 has a $600 balance and $3,000 limit, your balance total is $1,300 ($300 + $400 + $600) and your credit limit total is $6,000 ($1,000 + $2,000 + $3,000).

Divide $1,300 by $6,000 to get your balance-to-limit ratio: 0.22, or 22%.

Amounts owed counts for 30% of your credit score, so if you’re planning to take out a loan in the near future, you’ll want to pay careful attention to your balance-to-limit ratio. To boost your credit score, you should try to keep your balance-to-limit ratio at or below 20% on each card and overall. For scoring purposes, it doesn’t matter whether you’re paying your balance in full each month or carrying a balance; in either case, you need to keep your balance-to-limit ratio low on each card if you want to improve your credit score. For your overall financial situation, however, you should aim not only to keep your balance-to-limit ratio low, but also to pay your credit card balance in full and on time each month. That way, credit card interest and fees won’t eat into the money you have available to spend or save. Your net worth is more important than your credit score.

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