How is a Credit Score Calculated – Chapter 1: Utilization Ratio



This is the first chapter in a series of blogs on How a Credit Score is Calculated. I want this blog to empower consumers to take back control of their credit scores.    I have seen first hand, as a bankruptcy attorney, how lack of knowledge affects people.  We have been kept too long in the dark by the \credit card companies continuing to make tons of money off us.  I’m tired of it and I don’t want to see anyone else taken advantage of.  Many of my clients would love to ditch their credit cards forever, but we simple can’t because our economy relies too much on it.

Disclaimer:  Everyone’s credit score is based on their credit history and thus different value is given to

That being said, I believe the most important factor in your credit score is the utilization ratio.

What is Utilization Ratio?

This is the ratio between your existing debt to total maximum balance.

Example One

Lets say you have one credit card with a balance of $400 and a total maximum balance of $500, this means your ratio is 4/5 or 80%.

Example Two

Lets say you have two credit cards. One with no existing balance, but a maximum available balance of $1,000. Then you have another card with an existing balance of $2000, and a maximum available balance of $2,500. This means your ration will be? $2,000/$3,500 or 4/7 or 57%.

Comparing the two examples, example two would have the better utilization ratio. The idea is that creditors do not want to see you maintaining too many credit limit reaching balances because the likelihood you can’t pay the debt off is high thus you’re a risk factor. We can all get that. How many of us have realized that when we pay only the minimum, the interest is more then the minimum thus we continue to see our balances go up and up and up.

The magic utilization ratio to have is 30%.  If you’re below, your score sores; when you’re above, its abysmal.  Unfortunately, that’s not the end of it. They do say that for some people, too many open and high limit cards could also cause your score to go down because everyone’s score is based upon their particular situation. I have yet to see this, so I can’t expand on this, but just something to keep in mind.


Don’t Pay For Your Score or Report

One last thing before I end this chapter, don’t ever pay for your score or report. By law, every credit bureau, Transunion, Experian, and Equifax, is required to provide one free credit report to you. The best way to get these reports is to get one from each bureaus throughout the year, that way you can monitor your credit for free throughout the year. There are some debts that may not be reported in all the bureaus. However for identity theft purposes it should be sufficient.

Now, the free credit report will not tell you your score. Don’t pay for it! Many credit cards that you have now provide the score for you for free. You can also use free services such as and get an app on your phone that gives you instant access to your score and report from two credit bureaus instantaneously all year round. This is actually a chance in the law that happened recently.

Disclaimer: Information in this blog is informational and opinions. This blog does not guarantee any result, does not constitute legal advice, and does not create an attorney/client relationship.

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