Inflation has caused the cost of many everyday items to skyrocket, forcing many Massachusetts residents to scrimp. Obviously, though, you cannot scrimp on the essential items you need to survive. If you cannot pay in cash, it might be tempting to grab a credit card.
While there is nothing inherently wrong with using credit to pay for essential goods and services, too much debt can wreak havoc on your financial well-being. How much debt is too much, though? While there are many ways to answer the question, your credit utilization ratio can give you some valuable insight.
What is a credit utilization ratio?
Your credit utilization ratio is a comparison of your outstanding debt to the amount of credit you have available for use. This ratio is important, as all of the major credit reporting bureaus use it when determining individual credit scores.
How can you calculate your ratio?
Calculating your credit utilization ratio is not difficult. To determine yours, look at your credit card statement and find your credit limit and outstanding balance. Then, divide the amount you owe by your total credit line.
For example, if you have a $1,000 credit limit and owe $600 to the credit card company, your credit utilization ratio is 60%.
What is an acceptable credit utilization ratio?
According to Bankrate, it is advisable to keep your personal credit utilization ratio below 30%. If your ratio is any higher, you might not qualify for mortgages, car loans or additional credit cards. Moreover, your credit score is likely to plummet because of a high credit utilization ratio.
Ultimately, if paying off your credit cards seem unrealistic or downright impossible, it may be time to consider your debt-relief options, such as seeking bankruptcy protection.