A Credit Utilization Ratio

A credit utilization ratio is a measurement of how much of a consumer's available revolving credit is in use at a given time. Revolving credit generally includes credit cards and lines of credit, where the consumer can borrow, repay, and borrow again up to a limit. The ratio is usually calculated by dividing the reported balance on those accounts by the reported credit limits. It can be figured for a single account or for all revolving accounts combined. It does not typically include installment debt such as auto loans, mortgages, or student loans, because those accounts have fixed payments and a set payoff schedule rather than a reusable credit line. Credit reporting companies receive balance and credit limit information from lenders and other furnishers, usually each month. The ratio is not always a separate field that is stored on a credit report. Instead, it is often derived from the balance and limit that appear in the report. Because furnishers report on different schedules and may report a statement balance rather than the balance on a particular day, the ratio shown by a scoring model can vary from one reporting period to another. Some accounts, such as charge cards, may not have a traditional credit limit reported, and some issuers may report a high balance instead. Those reporting practices can affect how a ratio is calculated. The combined, or aggregate, credit utilization ratio is the sum of all reported revolving balances divided by the sum of all reported revolving credit limits. A per-account ratio looks at one account at a time. Credit scoring models may consider one or both forms, and different models may treat the information differently. There is no single cutoff that applies to every model or lender. The ratio is also separate from the debt-to-income ratio, which compares monthly debt payments with gross monthly income. A credit utilization ratio describes the relationship between reported balances and available revolving credit, not whether a payment was made on time. Credit reports generally show the balances and limits that were reported by furnishers, so the information used to calculate a ratio can be reviewed for accuracy. If a consumer finds an error, they may dispute it with the credit reporting company and the furnisher. Federal agencies such as the Consumer Financial Protection Bureau and the Federal Trade Commission publish educational materials about credit reports, credit scores, and the factors that can be considered in scoring models. Payment history, the length of credit history, new credit, and the mix of credit accounts are also commonly described as factors. A credit utilization ratio is one descriptive piece of the credit profile, and it is not a statement about a consumer's worth or a promise about any particular credit decision.

A consumer has one revolving account with a $100 balance and a $200 credit limit, and a second revolving account with a $75 balance and a $300 credit limit. The first account's credit utilization ratio is 50 percent, the second is 25 percent, and the combined ratio is $175 divided by $500, or 35 percent.