When was the last time you calculated your credit utilization ratio?

On Behalf of | May 20, 2022 | Bankruptcy, Blog

Even if you received a pay raise in the last few months, you may be struggling to pay for the items you use every day. This is unsurprising, as the price of many consumer goods has increased by more than 8% in the last year, according to the U.S. Bureau of Labor Statistics.

Having too much consumer debt adds to the problem, of course. After all, if you have maxed out your credit cards, you may have virtually no safety net. You also may have difficulty obtaining a loan for emergency expenses.

How much debt do you have?

There are a few ways to measure the amount of debt you have. A common one is to calculate your credit utilization ratio. This percentage tells you how much of your borrowing power you have used up.

To determine your individual utilization ratio, you must divide your credit card balances by your total credit limit. For example, if you have a $10,000 credit limit and owe $8,000, your utilization ratio is 80%. That is probably too high.

How much debt is too much?

Your credit score plays an oversized role in your ability to obtain financing. While many factors go into your credit score, your credit utilization ratio accounts for roughly 30% of it. Therefore, it benefits you to keep your credit utilization ratio as low as possible. In fact, most financial advisors recommend only using about 30% of your available credit.

If you have an overly high utilization ratio, you have the option of paying off your credit card balances. Ultimately, if your financial situation makes this virtually impossible, it may be time to explore other debt-relief options.

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