What is a Balance-To-Limit Ratio?
The balance-to-limit ratio is a comparison of the amount of credit being used to your total revolving credit available. This rate tells potential lenders how much debt you are carrying compared to your available credit, or how much available credit they are using. It only applies to revolving debt, like credit cards.
A balance-to-limit ratio is also known as a credit utilization ratio, and is a significant factor in calculating your credit score. Having a low balance-to-limit ratio both overall and on each card can improve your credit score. Learn more about what a balance-to-limit ratio is, how it plays a role in your credit score, and how to improve it.
Key Takeaways
- 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 youmanageyour available credit.
- A low balance-to-limit ratio, also called a credit utilization ratio, is preferrable to a high one.
- When you make more purchases, your balance-to-limit ratio increases.
- When you pay down your debt, your balance-to-limit ratio decreases.
How the Balance-To-Limit Ratio Works
The balance-to-limit ratio is important because it shows how responsibly youmanageyour available credit. Credit scoring companies consider this ratio when determining your credit score. A lower balance-to-limit ratio shows you are a lower risk borrower, so a low ratio is better for your credit score than a high ratio.
Amounts owed count for 30% of a FICO credit score. So if you plan to take out a loan in the near future, be aware of your balance-to-limit ratio. You can check on your overall debt picture by requesting a copy of your credit report from one or each of the three main credit bureaus, which are Experian, Equifax, and TransUnion. You are entitled to one free copy of your credit report per year, which you can also request through AnnualCreditReport.com.
For credit scoring purposes, it doesn't matter whether youpayyour balance in full each month or carrya balanceif you keepyour balance-to-limit ratio score low on each card. The lower you keep the balance-to-limit ratio, the more you will help improve your overall credit score.Many financial experts recommend keeping balance-to-limit ratios below 30% to have the best financial impact on your credit score.
Note
To improve your overall financial situation, keep your 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.
Role of Balance-to-Limit Ratios in Credit Scores
Your balance-to-limit ratio, or credit utilization ratio, is an important part of your credit score. It is a large part of your "amounts owed."
When you have a higher credit score, lenders are more likely to see you as a lower risk borrower and approve you for loans. With higher scores, you can also get better terms on your loan. On the other hand, when you have a low score, lenders view you as more a risk, so they may not approve you for a loan or they may charge you higher interest rates to make up for the risk.
Note
Having a low balance-to-limit ratio will contribute to a healthy credit score, but it is also important in how much money you can save. If you carry a high balance, you are likely to pay significantly more in interest.
How to Calculate Balance-to-Limit Ratios
For example, say you have one credit card with a $2,000 limit and a $200 balance. The balance-to-limit ratio is easy to calculate by dividing200 by 2,000 to equal 0.10. In other words, you would bee using 10% of their available credit.
If you have several credit cards, the balance-to-limit ratio is the sum of all the balances plus the sum of all credit limitsdivided 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%. In this case, you would be using 22% of your total credit.
How Is a Balance-to-Limit Ratio Different than a Debt-to-Income Ratio?
A balance-to-limit ratio is a measure of your total balance that you've used compared to your total credit limit. It shows whether you are using most of your credit or very little of your available credit. Your debt-to-income ratio is a comparison between the total monthly debt payments compared to your total monthly income. Lenders consider both metrics when extending you credit.
What Is a Good Balance-to-Income Ratio?
A balance-to-limit ratio is essentially a credit utilization ratio. Many financial experts recommend keeping this ratio below 30%. However, what is considered a good balance-to-limit is often determined by the lender's criteria.
How Important is Your Balance-to-Limit Ratio?
Your balance-to-limit ratio, which is essentially your credit utilization ratio or amounts owed, accounts for about 30% of your FICO credit score. Along with your payment history, it is the most important factor in determining your credit score.
The Bottom Line
Your balance-to-limit ratio is a key part of your credit and is a major factor in the calculation of your credit score. Lenders look at this metric to determine whether you are a risky borrower. You may be approved or denied a loan based in part on your balance-to-limit ratio. Try to keep your debt as low as possible to improve your balance-to-limit ratio by making more than the minimum monthly payment.
