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The problem with a high credit utilization ratio

On Behalf of | Apr 29, 2023 | Bankruptcy |

If you struggle with debt, you are not alone. People born between the mid-1960s and 1980 have, on average, $32,878 in debt, not including mortgages. There are various good reasons to use loans and credit cards when it comes to debt. In times of economic hardship, credit cards can become a saving grace. However, you may also have a high credit utilization ratio when you have too much debt.

Not only does having a high credit utilization ratio mean you have more debt, but it can also harm your overall score.

Lower credit scores

Various factors impact your credit score, but one of the major contributors is your credit utilization ratio. This is the amount of credit you currently use divided by the total amount of available credit. If you have a credit utilization ratio over 30%, it can lower your credit score. As the rate goes up, your credit card goes down.

Likewise, if you have a high ratio and your credit score drops, lenders can reduce your overall balance and cause the ratio to increase more.

Higher monthly payments

The more credit you use, the higher your bill will be every month. Additionally, if the rate affects your credit score, you may only receive offers with high-interest rates. High-interest rates can add to your monthly payment and how much you pay back to the lender overall.

In some cases, bankruptcy can be the optimal way to lose the debt and reduce your credit utilization ratio so you can rebuild your credit from scratch.