Your credit utilization ratio] or utilization rate is the amount of credit you are currently using divided by the credit you have available. Let’s revisit the scenario above. Consider a debt of $20,000 (the credit you are presently using) over four credit cards and small personal loans.
If those cards are not maxed out, and the actual credit limit or credit available to you is $40,000, then your utilization ratio would be 50%.
When you consolidate your debt into one account and close the credit cards and personal loans, it will drop your credit limit to the exact debt amount, which is $20,000.
Your utilization ratio makes up 30% of your credit score, so you want to keep it as low as possible.
A high utilization ratio would indicate that you are spending a lot of your monthly income on paying off debt. This suggests to a lender that you don’t have much disposable income for future purchases.
Keeping your utilization ratio low will increase your credit score quickly. It can take less than 45 days to see a score improvement when the ratio is lowered.