Your balance to limit is used by lenders as an indicator of your risk of default.
Balance To Limit Rate Is Only For Revolving Accounts
Revolving accounts are credit cards and lines of credit with a set limit that can be paid down and then used again and again. You are in control of the balance by making payments that decrease the balance and therefore lower the outstanding balance to available limit.
Also Called Utilization Rate
Your balance to limit is also called your utilization rate and is calculated by dividing the credit card balance by the credit card limit. Carrying above a 45% utilization rate may have lenders see you as a higher risk of default and will lower your credit scores. It is recommended to keep your balance to limit rates at below 30% on all revolving credit accounts.
Why Balance To Limit Impacts Credit Scores
A high balance to limit ratio may be a sign that you are having financial problems. If the rates go above 80% it is a strong indication that your risk of future default is very high. Kind of like your car can go 100 miles per hour but your risk of an accident goes way up if you do. If you have a high balance to limit on your credit cards you should consider balance transfers to other cards to bring your utilization rates down across all cards to less than 30%. This is an excellent reason not to close cards that you don't normally use so you can use them to keep your overall balance to limits lower.
Another Way To Lower Balance To Limits
We all get into situations where our balance to limit exceeds the 30% mark and we don't have the funds immediately available to pay them down so we let them ride. This lowers our credit scores. One way to solve this is to apply for a credit union personal signature loan. These loans are typically available up to $35,000 with just 680 credit scores. These are installment loans so they do not count towards your balance to limits and therefore can be used to pay down revolving accounts to below the 30% critical utilization rate.
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