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What does your credit utilization rate say about your finances?

Nowadays, many individuals use credit cards to pay for rent, groceries and other essential items. This makes sense, as four out of every 10 Americans simply do not have even $400 in savings. While reaching for your credit card can be beneficial, using it too often may put you in financial distress.

To determine if you are using too much credit, you may want to calculate your credit utilization rate. This easy-to-calculate rate compares the amount of credit you have already used to the amount your credit card company has made available.

Calculating your credit utilization rate

To calculate your credit utilization rate, you need to know two figures: your credit card balance and your credit limit. Once you have located these figures, which should clearly appear on your monthly credit card statement, divide your balance by your credit limit. Then, move the decimal two places to the right to see your credit utilization rate in the form of a percentage.

It is advisable to calculate both your per-card credit utilization rate and your overall rate. For the latter, add together all balances from your credit cards and all your credit limits. Then, divide your total balances by your total credit limit.

Understanding your credit utilization rate

To have the highest possible credit score, you probably want to maintain a credit utilization rate below 30%. If your rate is higher, you may want to consider paying more than your monthly minimum payments. Alternatively, you may want to explore bankruptcy protection to try to discharge some of your outstanding credit card debt.

Ultimately, taking control of your credit utilization rate is one of the more effective ways to boost your overall financial health.