Lesson 9 of 25 · 6 min
Utilization as a ratio
Utilization is the balance divided by the limit, a loan-to-limit ratio, not a dollar amount.
Utilization is the carried balance divided by the credit limit. It is a ratio. The dollar balance is one input. The reported figure is the quotient. Track 1 lesson 6 is loan to value: balance divided by collateral value. This lesson does not re-teach LTV. Utilization is that quotient with the limit in the denominator instead of a mark.
Wick & Pell Cards: limit $5,000, balance $3,840. Utilization is $3,840 ÷ $5,000 = 76.8 percent. The same $3,840 on a $12,000 limit is $3,840 ÷ $12,000 = 32.0 percent. The dollars owed did not change. The ratio did, because the denominator did. A file that reports utilization is reporting 76.8 or 32.0, not $3,840.
utilization = card balance ÷ credit limit
- card balance
- The amount outstanding on the line, including interest already added.
- credit limit
- The maximum the agreement presently permits. The denominator. Not a mark.
- utilization
- The reported ratio. Two different limits produce two different utilizations on one balance.
LTV moves when the loan moves or the collateral moves. Utilization moves when the balance moves or the limit moves. There is no daily mark on a card limit. The limit is a policy number. Raise it and the same $3,840 prints a smaller ratio. Leave it and every extra dollar of balance raises the ratio. The geometry is Track 1 lesson 6's two-input fraction, pointed at a ceiling rather than at an asset.
The reported figure is the ratio. $3,840 is the numerator. It is not what the file states as utilization.
Key terms
- Utilization
- Card balance divided by credit limit. Loan-to-limit. The reported figure is the ratio, not the dollars.
- Credit limit
- The denominator. A policy ceiling, not a collateral mark. Changing it changes utilization without changing the balance.
- Loan-to-limit
- Utilization named as the LTV analogue. Same fraction, different denominator.
Worked example
One balance, two denominators
Wick & Pell Cards. Balance $3,840. Compare a $5,000 limit with a $12,000 limit.
- Utilization on $5,000
- 76.8%
- Utilization on $12,000
- 32.0%
- Dollars owed
- $3,840
- What the file reports
- The ratio
- LTV analogue
- Track 1 lesson 6
$3,840 ÷ $5,000.
$3,840 ÷ $12,000.
Unchanged.
76.8 or 32.0, not $3,840.
Balance ÷ a denominator. Here the denominator is a limit.
The same $3,840 is 76.8 percent of one limit and 32.0 percent of another. Utilization is the quotient.
Check yourself
A Tallow Yard card shows $2,760. On an $8,000 limit, what is utilization? On a $4,000 limit, what is utilization?
Utilization is loan-to-limit, the everyday version of loan to value Track 1 lesson 6 computes on collateral. Open Loan to value, and how to compute it →
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.