Credit Utilization Rate

Posted in Finance, Accounting and Economics Terms, Total Reads: 227
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Definition: Credit Utilization Rate

Credit utilization rate is the rate of the existing credit that an individual has used during the period of time. It constitutes a major portion in the calculation of the credit value. A low utilization will decrease your risk and increase your credit score & vice versa.

 

Formula:

The credit utilization ratio = Amount of outstanding balances on all credit cards / Sum of each card's limit

 

Example

A customer has four credit cards each having a limit of 50,000. Each credit card is given to each family member. They have utilized their credit in a following manner.

Card 1: Credit line: 50,000 Balance Credit use: 10000

Card 2: Credit line: 50,000 Balance Credit use: 15000

Card 3: Credit line: 50,000 Balance Credit use: 25000

Card 4: Credit line: 50,000 Balance Credit use: 40000

 

Credit utilization ratio = (10000+15000+25000+40000)/ (50000*4)= 45%

 

As the total amount of debt and amount of credit is taken into account, shifting balance amount from one card to another will not change the credit utilization ratio because total outstanding debt remains the same. 


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