A credit utilization ratio (CUR) is the total amount of revolving credit that you are using (your revolving debt) divided by the total amount of revolving credit that is available to you including credit cards, lines of credit, HELOCs, and more. A CUR can apply to both personal and business financing and is calculated using the following formula:
(Total Revolving Debt/Total Revolving Credit Available) x 100 = Credit Utilization Ratio
If you have $50,000 in available revolving credit and have a balance (the debt you borrowed) of $10,000, you have a 20% credit utilization ratio.
(10,000/50,000) x 100 = 20%
Credit utilization ratios are checked by businesses that provide financial products, such as leases or loans. These ratios help them determine how risky a borrower or applicant is. But don’t worry about your credit score being impacted.
This information is usually found through a soft inquiry (also known as a soft pull), so your score shouldn’t be affected. So, where do you want your numbers to be?
There are averages to try and stay below, but certain businesses will have higher usages like a seasonal gift shop stocking up for the busy season or a real estate investor purchasing multiple properties and using revolving credit for short-term expenses.
The same can go for a business or person that used their credit card to pay a tax bill but will clear the debt over the next two months. This is when knowing your ideal number and being able to explain it to the lending company matters.
Good and Bad Credit Utilization Ratio Numbers
A good credit utilization ratio for both businesses and consumers is under 30%. When you go above this, it could mean you’re not good with your finances or that you owe too much to a financial institution, making you less creditworthy. A score of 100% means you’ve maxed out all available credit. You want to keep track of your credit utilization to avoid maxing out your credit limit.
When your CUR is too high, you’ll likely be rejected for financing like small business loans and forms of revolving credit like a business credit card. If you do get approved but have a high CUR, you may get worse terms like a higher interest rate, or you may need to put more collateral down compared to someone with a lower credit utilization ratio. The lending company wants to know you have the money and financial responsibility to be able to make payments. High CURs indicate the opposite for both.
But don’t panic if your CUR is high. There are ways to lower your utilization so that you can build the lender’s confidence.
How to Lower Your Credit Utilization Ratio
To lower your CUR, do the following:
- Pay off as much of your balances as you can with a lump sum.
- Make extra payments toward existing debt when you have extra cash flow.
- Apply for a credit increase, if wise for your business.
- Keep old accounts open.
- Consider opening a new line of credit or credit card if you can support payments.
The way to reduce your credit utilization ratio is to lower the amount of revolving debt you owe on the balance, or to increase the amount of revolving credit you have available. But make sure the debts you’re paying off or lines of credit you’re opening count. For example: Paying off a small business loan early won’t impact your credit utilization ratio because it is not revolving debt. However, paying off a credit card will.
Pro-tip: If the financial institution or company you are applying with only uses one of the three credit bureaus, contact the bureau to find out which revolving credit accounts are reported and pay those off more quickly. This can reduce your credit utilization ratio (as reported by that particular vendor) faster.
By paying the balance off more quickly, whether it is with a lump sum or multiple payments, your total revolving debt goes down, and so does your ratio.
It’s also important to keep old accounts with no balance open. When you close them, the total amount of available credit disappears and automatically increases your CUR if you have a revolving debt balance. And then there is the matter of potentially opening new lines of credit or credit cards. Opening new lines increases your available credit, but you should only take this step and use additional financing if your business can support it financially.
Every company and person with a balance on their revolving debt has a CUR above 0%. As long as you remain under 30%, you’ll likely be seen by lenders and vendors as a low-risk borrower, renter, or customer. When your credit utilization ratio is over 30%, let the vendor know the reasons why, as they may be industry-specific and this can offset the concerns. Or you can use the techniques above to reduce your CUR before you apply for financing or a lease.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
