Balance-to-Limit Ratio - Explained
What is a Balance-to-Limit Ratio?
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What is a Balance-To-Limit Ratio?
A Balance-to-limit ratio is a ratio used in the calculation of the credit scores of borrowers. This ratio compares the amount of credit being used by a borrower to the total amount of credit available. The balance-to-limit ratio is calculated by dividing the total credit balance of a borrower to the total credit being used. This ratio is otherwise called the credit utilization ratio, it tells a lender the amount of the available credit a borrower is using. A low Balance-to-limit ratio results in positive credit rating, it improves the credit score of borrowers.
How Does a Balance-To-Limit Ratio Work?
The Balance-to-limit ratio is one of the ratios credit scoring companies use to evaluate the credit quality of a borrower. A low balance-to-limit ratio shows that a borrower has carefully managed his available credit while a high balance-to-limit ratio tells a potential lender that a borrower has a huge amount of debt than the credit available to him. The lower the balance-to-limit ratio, the better the overall credit score of a borrower and vice versa. Potential lenders pay attention to the balance-to-limit ratio and credit score of borrowers. Borrowers are often advised to maintain a ration below 20 percent on each of their credit cards so as to have a good credit score.