Credit utilization ratios, or CURs, are used to determine your risk level when you’re applying for business credit cards, business lines of credit, loans, or to get approved for a lease, and other products or services where the business evaluating you has a financial risk. They are calculated by dividing the total amount of revolving credit (credit that refills once paid back) that you or your business is using by the total amount of revolving credit available to you, multiplied by 100.
Credit Utilization Ratio = (Total Revolving Debt / Total Revolving Credit Available) x 100
Both your personal and business credit utilization ratios can be used when your business applies for financing, to rent a space, and by investors or partners you’re looking to bring on. It is a way to know how well you and your business handle debts and payments — unlike a credit score, which is a measurement of how fiscally responsible you are, your history of making payments to vendors, bankruptcies that have occurred, and how much debt you owe.
While the number varies by industry and applicant, a good CUR stays under 30%, as it means the business is managing cash flow in a smart way so that they don’t need to take on debt. As a rule of thumb:
- Good CURs are 30% or less
- Ok CURs are 31% to 49%
- Bad CURs are numbers over 50%
Here’s how to calculate yours.
If you have $100,000 available in revolving credit and a balance of $25,000 that needs to be paid back, you have a 25% credit utilization ratio.
(25,000 / 100,000) x 100 = 25%
In this situation, you have a good credit utilization ratio, so you will be deemed more “creditworthy,” meaning there is less risk in lending you money, extending a line of credit, or having you as a tenant.
There’s no risk in having the business you’re applying to run your CUR, as there is no impact to your personal or business credit score. This number is calculated via the information found in a soft inquiry, not a hard one, which is publicly available information, so anyone and any business can run it. Because there is no impact to you or your business, the company running a credit utilization ratio does not need your permission, and there are businesses likely running them right now without you knowing.
When Having a Low CUR Is a Good Idea
Having a low CUR is a good idea when you’re applying for financing, looking to take on a lease, trying to attract investors, or want to make a large purchase and the lender will be looking to see if you can make payments. If you are not in one of these situations, you likely don’t need to worry about your score.
When you need to lower your score, you don’t have to worry about every account at each credit bureau. Contact the company you’re about to apply with and ask which credit bureau they use to pull a credit report from so they can calculate your credit utilization ratio. Not every creditor reports to all three bureaus, so you only need to worry about the one they use.
You may have two business credit cards and one line of credit. One business credit card may be reported to Experian Business and the other card and line of credit to Equifax Business. If the company you’re applying to only uses Experian, you only need to focus on that one specific credit card.
Next, you’ll want to ask that bureau what tradelines (the line items that list debts) are on your account. These are what add up to calculate your credit utilization ratio and are how you can lower your number.
Ways to Improve Your Ratio
The way to improve your credit utilization ratio is to either lower the balance you owe on revolving credit accounts or increase the amount of revolving credit available to you. Here are some of the options you have available:
- Apply for a higher credit limit on a credit card.
- Keep old accounts open if you know your CUR is about to be evaluated.
- Pay off as much of a balance as you can before your score is calculated.
- If you have a good relationship with a lender or a bank, open a line of credit.
- Get a business debt consolidation loan to pay off revolving credit, as loans are installment debts and not revolving. Note: This could have a temporary negative effect on your business credit score, and a long-term one if you miss payments.
By either increasing the amount of revolving credit you have available or decreasing the revolving debt you’re carrying, your CUR will improve. And if you’ve ever noticed you’re starting to get more “You’re Approved” types of marketing messages in your mailbox, chances are your score is already in a good range, as companies are actively trying to pitch you their offerings.
The Types of Businesses That Use Credit Utilization Ratios
Any company that takes a financial risk by lending or leasing to a third party will use credit utilization ratios, including:
- Equipment, vehicle, and machinery manufacturers and sellers
- Financial institutions like credit unions, banks, and alternative lenders
- Credit card issuers
- Landlords
- Credit bureaus and reporting agencies
- Insurance companies
- Businesses that send pre-approved offers
Equipment, vehicle, and machinery companies will pull a soft inquiry to get your credit utilization ratio if you’re talking to them about purchasing or leasing their products, or when they’re about to try to sell or lease you expensive assets. The same goes for marketing research companies and businesses with in-house marketing teams, like insurance companies and credit card issuers that send pre-approved offers. Your ratio helps them determine your risk level so they know who to send the offers to.
Landlords will want to know if you have substantial debts before they give access to their property, especially if others are interested, because it reduces or increases their risk of you not paying rent depending on your score. Credit bureaus and reporting agencies use this ratio when creating your credit score, and underwriters at financial institutions use it as one of the ways to determine what terms to offer if you’re given a business loan, line of credit, or credit card — or if you should be approved at all.
Other businesses, like utility companies, likely won’t use a credit utilization ratio and will instead run a soft inquiry to get your credit score, which is another number used to determine how likely you are to make payments.
Credit utilization ratios are a measurement of how much revolving debt you have compared to how much credit you have available, and are used to evaluate how risky it is to lend, lease, or rent to you. A company calculating your ratio is nothing to worry about, and the number is easy to adjust by either increasing your revolving credit limit or reducing the revolving debt you owe.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
