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What should your credit utilization be if you want a car loan?

What should your credit utilization be if you want a car loan?

 

Your credit utilization ratio is used to calculate affordability for a loan and is critical for lenders to decide whether to approve a car loan or not. As it has such an influence over a car loan application, we think it essential that everyone understands what this ratio is and how you can influence it.

What is your credit utilization ratio?

Your credit utilization ratio is a measure of how much available credit you are using at the time. The exact amount of credit available and the ratio is calculated depending on your income so it won’t be the same for everyone.

A credit utilization ratio is made up of two parts. The first is calculated purely on credit card borrowing. How much you owe to your credit card company versus now much credit you have available.

The second is overall borrowing. How much of the available credit available to you is being used at the time.

The more of your available borrowing you’re using, the higher your credit utilization ratio. The less debt you currently have, the lower your credit utilization ratio.

Lenders use this ratio to understand how well you’re doing financially and whether it is likely you can afford the loan or not.

The higher the ratio, the more debt you have and the more closely a lender will analyze your situation. The lower the ratio, the more comfortable a lender will likely be lending to you.

Is there a perfect credit utilization ratio?

There is not a ‘perfect’ credit utilization ratio as lenders have different criteria and ways of working. As a general rule, a 30% credit utilization ratio is regarded as close to perfect.

Go higher than that and lenders may be hesitant to agree a car loan.

How to calculate your credit utilization ratio

It’s actually quite straightforward to calculate the first part of your credit utilization ratio, the credit card part. Unfortunately, you cannot really calculate the second part without a lot more information.

To calculate your credit card utilization ratio, divide the current balance on all your credit cards by the credit limit then multiply it by 100.

For example, if you have a credit limit of $2,000 and have a balance of $800, you have a credit utilization ratio of 40%. ($800 / $2,000 x 100).

If you have more than one credit card, add the balances and credit limits together and perform the same calculation.

Your credit utilization ratio makes up a significant portion of your credit score and is second only to payment history in priority. That makes it something everyone should understand, even if you’re not planning to apply for a car loan.

If you need help with any aspects of a car loan or application, contact our team and we would be happy to help.

 

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