Thanks to near-record inflation, many families in Alabama and across the country are struggling to make ends meet. If you cannot afford basic necessities, it might be logical to reach for your credit cards. After all, credit cards allow you to buy essential items now and pay with interest over time.
Using your credit cards too frequently, though, can be catastrophic for your credit score. It also can create a vicious cycle that makes it virtually impossible to clear away your debt. To know whether you are using too much credit, it makes sense to calculate your credit utilization ratio.
What is a credit utilization ratio?
A credit utilization ratio is a comparison of how much credit a person has available to the amount of credit he or she has already used. This is a good benchmark for financial health, as many credit reporting bureaus use it when calculating credit scores.
How do you do the calculation?
Calculating your credit utilization ratio involves some grade school math. First, you need to know your total credit line and outstanding balance. Then, you must divide the credit you are using by the credit you have available. Finally, multiplying by 100 should give you a usable percentage.
For example, if you have a $1,000 credit limit and have charged $800, your credit utilization ratio is 80% (800/1,000 X 100).
What is a good credit utilization ratio?
According to Experian, you should strive to keep your credit utilization ratio at or below 30%. If your ratio is higher than that, you are likely to see a decline in your credit score. You also might encounter significant difficulties when applying for new credit cards, home mortgages or auto loans.
Ultimately, if paying off your credit cards to lower your credit utilization ratio seems unrealistic, you might want to look into bankruptcy and other debt-relief alternatives.