You may have noticed the cost of everyday items has increased significantly in the past few months. Alarmingly, according to reporting from CNBC, nearly half of Americans believe the cost of living increase is likely to threaten their financial security.
Because many major items are more expensive than ever, it may be tempting to reach for your credit cards. While there may be nothing inherently wrong with charging some purchases, you should keep a close eye on your credit utilization ratio.
What is your credit utilization ratio?
Your credit utilization ratio is simply the amount of available credit you are currently using. To calculate the ratio, simply find your credit card’s revolving balance. Then, divide by your credit limit. For example, if you have a revolving balance of $4,000 and a credit line of $8,000, your credit utilization ratio would be 50%.
It may make sense to calculate your credit utilization ratio for each credit card you own. You may also want to calculate your total utilization ratio by adding together all your revolving balances and dividing by your credit limit across all your cards.
What is an ideal credit utilization ratio?
Experian, one of the three major credit reporting bureaus, recommends keeping your credit utilization ratio lower than 30%. If your ratio is higher, you may not have a good credit score. You also may have difficulty obtaining financing for a home, car or other major purchases.
Having an abnormally high credit utilization ratio may be one of the first signs of financial distress. Ultimately, exploring bankruptcy and other debt-relief options may help you build the foundation for a better financial future.