If you want to purchase a new home, car or any other expensive item, you have a couple of options: You can either pay cash or secure a loan. Still, most Americans do not have even three months of their salaries in savings.
When you apply for a loan, the financial institution is likely to look at your credit score. While most credit scores fluctuate frequently, paying close attention to yours may help you gauge your borrowing ability. When it comes to your credit score, 30% is important for two reasons.
Your credit utilization ratio
Most credit bureaus use credit utilization ratios when calculating credit scores. In fact, you can expect your credit utilization ratio to account for roughly 30% of your credit score.
Your credit utilization ratio is simply the amount of credit you are currently using relative to how much you have available. For example, if you have $1,000 in available credit and are using $500, your credit utilization ratio is 50%.
Your debt-relief options
It can be tempting to reach for your credit cards every time you need to make a major purchase. Still, if you do not pay off your credit cards routinely, your credit utilization ratio may negatively affect your credit score. To have a good score, you should keep your credit utilization ratio at or below 30%.
If your credit utilization ratio is more than 30%, you may have a diminished borrowing capacity. Ultimately, while it may be possible for you to pay off your outstanding balances and improve your credit utilization ratio, you may also want to explore bankruptcy and other debt-relief options.