What is a credit utilization ratio?

Canadian credit bureaus also use your credit utilization ratio to calculate your credit score, a three-digit number from 300 to 900 that reflects how well you manage credit. You’ll need a score of at least 600 to be approved for a loan or line of credit, but a score of 700 or more can get you a better interest rate. 

How to calculate your credit utilization ratio

1. Add up your total debt, including credit cards, line of credit and loans. 
2. Add up your credit limits from the same cards, etc. 
3. Divide your total debt by your total credit limits.
4. Multiply the result by 100 to get a percentage.

Consider this example, with your total debt at $10,000, and your total credit limit at $40,000. Here’s how to calculate your credit utilization ratio:

$10,000 ÷ $40,000 = 0.25

0.25 x 100 = 25%

In this scenario, the credit utilization ratio is 25%. So for every $1 you have in available credit, $0.25 is already accounted for as debt. 

What is a good credit utilization ratio?

In general, the lower your credit utilization ratio, the better. A ratio of 30% or less is considered acceptable by lenders, credit bureaus and the Financial Consumer Agency of Canada. 

Example: “To improve her credit utilization ratio, Zuzana is paying off her credit card debt using the ‘debt snowball’ method—tackling the smallest debt first.”

Read more about debt:

• How to calculate your debt-to-income ratio—and why you should know this number
  How would you assess your financial situation? Check out this guide to figuring out your debt-to-income ratio and the importance of knowing your DTI ratio.

• How much credit card debt does the average Canadian have?
  How does your credit card debt stack up against the average Canadian’s? Find out as we dive into how we handle what we owe.
• Does it make sense to use a line of credit to pay off credit card debt?
  How to deal with outstanding credit card balances? A line of credit is one way to take care of that high-interest debt, but it’s not a one-size-fits-all solution.
• Five money hacks to reduce credit card debt
  Paying down credit card debt can be challenging if you don’t have a plan. Here’s how to chip away at your balance—and prevent it from growing.
• Canada’s best credit cards for people with bad credit
  If you want to improve your credit score you’ll have to show you can handle credit responsibly—and, used properly, the right credit card can assist in rebuilding bad credit.

About MoneySense Editors

MoneySense editors and journalists work closely with leading personal finance experts in Canada. Since 1999, our award-winning magazine has helped Canadians navigate money matters.

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