What is a credit utilization ratio?

A credit utilization ratio refers to the percentage of available credit that a person is currently using. It is a significant factor in determining one's credit score. To calculate the credit utilization ratio, divide the total outstanding credit balance by the total available credit limit and multiply the result by 100. For instance, if a person has an outstanding balance of £500 on a credit card with a limit of £2000, their credit utilization ratio would be 25%. Lenders consider a lower credit utilization ratio as a positive sign of responsible credit management, as using a higher percentage of available credit may suggest financial instability or over-dependence on credit. It is advisable to maintain a credit utilization ratio of below 30% to maintain a good credit score.