Credit Card Utilization Ratios

You’ve probably seen time and time again the importance of keeping your credit card utilization ratios at or below 50%. The fact is keeping your credit utilization ratios as low as possible is just plan smart. In fact, “Consumers with FICO® scores of 800 use, on average, 7% of their available credit,” says Can Arkali, senior scientist for analytics and scores development at Fair Isaac Corp.

Now to clear up any confusion this doesn’t apply to installment loans such as auto loans, mortgages and student loans. The ratio for installment loans is known as your installment utilization ratio.

Revolving lines of credit such as credit cards is what is referred to as credit card utilization ratios. Your credit card utilization ratio is a measure of how much you owe on a credit card compared with the card’s credit limit. For example, if you have a credit card with a $10k credit limit and you currently have an outstanding balance of $5k then you currently have a 50% credit card utilization ratio on that card.

Now when it comes to credit scores like FICO®, credit utilization ratios are looked at in two ways:

• Per credit card utilization ratio: This determines how much of each of your card’s credit limits you are using. (Example: a credit card with a $10k limit and $5k balance has a 50% per card utilization ratio)
• Overall credit card utilization ratio: This ratio factors in all of your credit cards and their credit limits into account. (Example: Total of 3 credit cards totaling $30k in credit limits with an overall balance of $15k across all 3 cards has a 50% overall credit card utilization ratio)

Is one type of credit utilization ratio more important than another?

No, both of these ratios play an important role in the makeup of your credit scores which ultimately impacts your business funding ability. What’s important to know is keeping both of these ratios at or below 50% prior to applying for business credit lines is crucial. Ideally you shouldn’t have more than 30% credit utilization ratios across all cards for maximum impact.

The reason for this is banks use FICO® scores, credit utilization ratios, size of card’s limits, length of payment history and various other factors to decide whether to extend credit to your business and at what terms and limits.

As you know, banks set their own credit utilization standards, so an acceptable credit utilization ratio with one bank might be considered too high with another. This is why we emphasize at least 50% or below.

With ratios above 50% you’re more than likely to receive a conditional pre-approval when applying for our unsecured business credit lines. This means there may be certain pay downs required prior to moving forward with the funding amounts that are projected for your company.

What steps can you can take to lower your credit utilization ratios?

Keeping both ratios as low as possible will improve your FICO® scores and your chances of getting business credit lines. One obvious step to making this happen is reducing the balances on your credit cards. This will help both ratios drop. You can accomplish this by either paying down your balances or increasing your card limits. The problem with increasing your card limits is that you will need to request a credit limit increase from your card issuer which results in a hard inquiry to your credit. If you didn’t know, hard inquiries are a big no, no for business owners that are applying for business credit lines.

Another step you can take is through a balance transfer. Although this may improve the per card utilization ratio it does not improve the overall credit card utilization ratio since the debt amount total stays the same. You’re basically just shifting a portion of the balance from one card to another credit card.

Remember, how much you owe makes up 30% of your FICO® scores, and your credit utilization ratios play a huge role in influencing that factor. Now even though all the experts say to keep your ratio below 30%, there are no certain rules for credit utilization percentages. The bottom line is the lower the better.

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About the author

Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, Business.com, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in ‘Fox Small Business’,’American Express Small Business’, ‘Business Week’, ‘The Washington Post’, ‘The New York Times’, ‘The San Francisco Tribune’,‘Alltop’, and ‘Entrepreneur Connect’.