Rebuilding Credit in BC, Canada: What is a Credit Utilization Ratio?

Your credit utilization ratio makes up 30% of your rating and is the second most important factor when determining your score (after payment history). Calculated as a percentage, this ratio is the amount of available revolving credit you are using compared to your overall credit limit – and it plays a significant role in personal finance.
Understanding how utilization impacts your score, therefore, is essential.

 Why Do Credit Utilization Ratios Matter in BC

Your credit score provides lenders with a snapshot of your money management skills, which they assess when determining whether to approve you for a loan.

A credit utilization ratio below 30% is considered ideal – anything more than that will cause your rating to go down. A high percentage indicates to lenders that you are spending a large portion of your income on debt repayment, putting you at risk of defaulting on your loans. 

On the other hand, a 0% credit utilization ratio isn’t helpful either. If you aren’t actively using credit and repaying your balances, lenders are unable to effectively measure your creditworthiness and approve you for financing.

To improve your score – and your chances of an approval – it’s recommended to keep your credit utilization ratio around 10%.

Understanding How Your Credit Utilization Ratio is Calculated in BC

Your credit utilization ratio is a fluid number that fluctuates as your balances and limits change. Calculating your percentage is easy – simply divide your total balance by your total credit limit, then multiply by 100 to get the percentage.
For example:
If your credit card balance is $800 and your limit is $2,000, divide $800 by $2,000, then multiply by 100. In this instance, your credit utilization is 40%.
Note: If you have more than one credit card or line of credit, add up the balances from all accounts and their corresponding limits and use the same equation to calculate your overall credit utilization ratio.


How to Improve Your Credit Utilization Ratio in BC?

The key to improving your credit utilization is by lowering its percentage. Here are five tactics to consider:
1. Pay down your balances
By keeping your balances under a certain threshold, you’ll reduce your utilization ratio and boost your credit score.

2. Apply for a credit limit increase
By upping your available limit and paying your balances down, your utilization ratio will calculate at a lesser percentage, thus improving your credit score.

3. Decrease your spending
By cutting back on spending, your utilization ratio will remain lower since you are using less available credit, which can improve your rating.

4. Pay off your credit cards more frequently
By making weekly or bi-weekly credit card payments, you’ll maintain a lesser balance, regardless of your spending habits, and improve your utilization ratio. 

5. Don’t close unused credit cards
When repairing your rating, you may be tempted to close unused accounts. However, this will lower your available credit limit, increase your overall utilization ratio, and negatively impact your score.

Contact TransCanada Finance to Start Rebuilding Your Credit Score

TransFinance Canada believes that knowledge is power - and we’re committed to providing consumers with the information they need. Whether you have bad credit, no credit, or a high credit utilization ratio, our team will help you understand your score and recommend solutions to improve it, so you can meet your financial goals. 

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