Let’s start by knowing what the balance-to-limit ratio is all about:
The balance-to-limit ratio can be defined as the comparison of the used credit and the total credit available to a borrower. It can also be defined as the rate of credit used and helps in the calculation of credit scores. The balance-to-limit rate is important because it helps the potential lenders to be aware of your present available credit ratio. Credit scores increase with a low ratio on each credit card.
A thorough description of balance- to- limit ratio:
Balance -to-limit ratio reveals how the investors make use of the available credit. The lower the balanced to limit ratio the better the credit scores. The credit scoring companies determine investors credit score based on the holder’s balance to limit ratio. Always make sure to keep your ratio low as the low ratio is better for your score than a high ratio.
Also for the better overall financial situation, keep your balance limit ratio low and pay credit card balances in full and on time each month. That way, the money available to save will not be consumed by credit card interest and fees rate. Thus some investors regard net worth more important than a credit score.Put your balance limit ratio into consideration especially if you are thinking of requesting for a loan in the future. Because 30 % of your credit score is determined from your outstanding debt. To improve your credit score, maintain at least 20% balance-to-limit ratio on each card. Remember that lower balance-to-limit ratio will always aid the increment of overall credit score.
How to calculate the balance-to-limit ratio:
For instance: Suppose an inventor has one credit card of $2,000 limit with a balance of $200.To calculate the inventor’s balance-to-limit ratio just divide 200 by 2,000 to equal 0.10. That means the inventor has 10% available credit score.
In the situation where an inventor has many credit cards, the calculation is also simple. The sum of all the balances added with the sum of all the credit limit. Then, divide with total balance and a total credit limit.Whatever the sum, that’s your balance-to-limit ratio.
Let’s assume that an inventor has three credit cards:
First card: $300 Balance with $1,000 limit
Second card: $400 balance with $2,000 limit
Third card: $600 balance with $3,000 limit
To calculate the balance-to-limit ratio
Total of the 3 balances,that’s $300 +$400+$600=$1,300
Total of the 3 limits: $1,000+$2,000+$3,000=$6,000
then divide balance with a limit that’s $1,300\$6,000=0.22 or 22 percent.
So the balance-to-limit of the investor with three credit cards is 0.22 or 22 percent.