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Imagine you have four credit cards, each with a $5,000 limit, for a total of $20,000. You have a balance of $2,000 on Credit Card A from vacation travel, $1,000 on Credit Card B from buying new car tires, $2,000 on Credit Card C from last holiday season, and $1,000 on Credit Card D from regular monthly bills. Altogether, you owe $6,000. If we calculate that as a percentage, we have your credit card utilization rate: 30%.

In this guide, we’ll focus on credit utilization, determine how much of your credit you should use, and show how credit card utilization affects your credit score and overall financial standing.

What Is a Credit Utilization Ratio?

Your credit utilization ratio is a fancy way of referring to how much of your credit you’re using. Lenders and credit reporting agencies use it as an indicator of how well someone is managing their finances.

A low credit utilization ratio says you live within your means, use credit cards responsibly, and therefore probably manage the rest of your finances well. A high credit utilization hints that your expenses are outpacing your income, a sign that you’re misusing credit cards, and possibly mismanaging the rest of your finances.

The reality of the situation may be different. Perhaps you have temporary cash flow problems due to a job loss. Or you happen to have a pileup of pricey expenses within a short time, such as medical bills, car repairs, and a destination wedding. It happens. That’s why credit utilization is just one factor that goes into calculating your credit score.

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How Do You Calculate Your Credit Card Utilization Rate?

In the example above, we saw that if you have $20,000 of credit available to you, and you owe $6,000, your credit utilization rate is 30%. How did we get there? To find out your credit card utilization rate, simply divide your total credit card balances by your total credit line, like this:

Total Balance / Total Credit Line = Utilization Rate

With the numbers from our example, it looks like this:

6,000 / 20,000 = .3 or 30%

Simple, right? You’ve got this.

What Counts as “Good” Credit Card Utilization?

As it turns out, just because you’ve been approved for a $10,000 credit card doesn’t mean it makes financial sense to charge $10,000 worth of rosé and seltzer — even if you know you can pay it off over a couple of months. In fact, you might be shocked to learn how little of your available credit you’re supposed to use.

The general rule is that you should not exceed a 30% credit card utilization rate. That means that in our example, you would not want to use more than $6,000 of your available $20,000 credit. Even though 30% might seem like a small percentage, keeping below that threshold can ensure that your credit score isn’t being dinged for over-utilization.

How Can You Lower Your Credit Card Utilization Ratio?

You can lower your credit utilization ratio by paying down your credit card balances. Ideally, you should pay off your credit card balances in full every billing cycle to avoid paying interest. When that’s not possible, pay off as much of the bill as you can.

Whatever you do, don’t make a habit of paying only the credit card minimum payment suggested on your bill.

When trying to pay down your credit cards, focus on the one with the highest interest rate. That way, you’ll save the most money on interest. Or you can pay off your cards with a personal loan.

In fact, debt consolidation is one of those most common uses for personal loans. A personal loan calculator can show you how much you could save on interest.

Another way to lower your utilization rate is to increase your available credit. Ask your bank to raise your credit card limit. If they agree, your utilization will quickly drop. Also, keep open any cards you don’t use rather than closing the accounts. They’re serving a valuable purpose by contributing to your credit limit, even if you’ve cut up the actual cards.

As you can tell, credit utilization is a nuanced topic. Learn all the ins and outs in our Guide to Lowering Your Credit Card Utilization.

How Does Credit Card Utilization Affect Your Credit Score?

You may be wondering, How much will lowering my credit utilization affect my credit score? Credit card utilization plays a big role in how companies compute your credit score. In fact, about 30% of your credit score is determined by your credit card utilization rate. That means a high credit card utilization rate can adversely affect your credit score. For a deep dive into the topic, check out How Does Credit Utilization Affect Your Credit Score?

How Do You Monitor Your Credit Card Utilization?

Your credit utilization might seem difficult to keep track of. But we live in the 21st century, so it’s actually quite easy to set up account reminders to alert you when you are approaching that 30% credit card utilization mark.

In addition to watching your credit usage, make your best effort to pay your credit card bills on-time each month. Checking your credit score regularly will also help you keep your financial health in check. Although you don’t want to check your score too often, it’s good to keep tabs to make sure the data being reported is accurate.

The Takeaway

Your credit card utilization ratio is the sum of all your credit card balances divided by the sum of your credit limits. Credit reporting agencies recommend keeping your ratio at 30% or below. Higher ratios can hurt your credit, since credit utilization accounts for 30% of your credit score.

To lower your utilization rate, simply pay down your credit card balances. And think twice before closing a credit card you no longer use. You might also consider consolidating your credit card debt with a personal loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL-Q424-057

If you have high-interest credit card debt and are ready to put together a plan to pay it back, you might be considering one of two popular methods: credit card refinancing vs. debt consolidation.

Both involve paying off your debt with another credit card or loan, ideally at a lower interest rate. Still, the two methods are not the same, and both options require careful consideration. Below, we’ll discuss the pros and cons of each debt payback method, so you can make an informed decision.

What Is Credit Card Refinancing?

Credit card refinancing is the process of moving your credit card balance(s) from one card or lender to another with a lower interest rate. The main purpose of refinancing is to reduce the amount of interest you’re paying with a lower rate while you pay off the balance.

A common way to accomplish this is to pay off your existing credit cards with a brand-new balance transfer credit card. This type of card offers a low or 0% interest rate for a promotional period that may last from a few months to 18 months or more.

Recommended: The Risks of Payday Loans

Benefits of Credit Card Refinancing

We’ve discussed the goal of credit card refinancing — to lower your interest rate — and how to accomplish it. Now let’s explore some of the benefits (and drawbacks) of refinancing.

Pros of Refinancing

•  You may qualify for a promotional 0% APR during your card’s introductory period. If you can pay down your debt during this time, you could potentially get out of debt faster.

•  Depending on the interest rate you’re offered, you could save money in interest charges.

•  Bill paying may be easier if you decide to refinance multiple credit cards into one new credit card.

•  If monthly payments are reasonable, it may be easier to consistently pay them on time. This can help build your credit score.

Cons of Refinancing

•  The introductory 0% interest period is short-term, and after it ends, the interest rate can skyrocket to as high as 25%.

•  There may be a balance transfer fee of 3%-5%, which can add to your debt.

•  0% interest balance transfer cards often require a good or excellent credit score to qualify.

•  Your credit score may temporarily dip a few points when you apply for a new credit card or loan. That’s because the lender will likely run a hard credit check.

Recommended: Loans With No Credit Check

Who Should Consider Credit Card Refinancing?

Credit card refinancing isn’t right for everyone. That said, a balance transfer to a 0% APR card could be a good move if you have a smaller debt to manage or are carrying multiple high-interest debts. Plus, transferring multiple balances into one card can streamline bills.
Refinancing may make sense if you’re looking for better terms on your credit card debt, qualify for a 0% APR, and can pay off the balance before the promotional period ends.
So, as you’re weighing your options, you’ll want to consider a number of factors, including:

•  Your credit score and credit history

•  How much debt you have

•  Your personal finances

What Is Credit Card Debt Consolidation?

Credit card consolidation refers to the process of paying off multiple credit cards or other types of debt with a single loan, referred to as a debt consolidation loan. The main purpose of consolidation is to simplify bills by combining multiple credit card payments into one fixed loan payment.

A borrower may also pay less in interest, but the difference may not be as great as with refinancing. An applicant’s credit score and other financial data points will determine their personal loan interest rate.

There are pros and cons to paying off multiple credit cards with a single short-term loan. Let’s take a look:

Pros of Debt Consolidation

•  You can pay off multiple debts with one loan, which can take the guesswork out of bill paying.

•  The structured nature of a personal loan means you can make equal payments toward the debt at a fixed rate until it is completely eliminated.

•  With most personal loans, you can opt for a fixed interest rate, which ensures payments won’t change over time. (Variable interest rate loans are available, but their lower initial rate can go up as market rates rise.)

Cons of Debt Consolidation

•  The terms of a loan will almost always be based on your credit history and holistic financial picture. That means that not every borrower will qualify for a low interest rate or get approved for a personal loan at all.

•  You may need to pay fees, including personal loan origination fees.

•  You’ll likely need to have good credit in order to qualify for the best interest rate.

Credit Card Refinancing vs Debt Consolidation

To recap, the difference between debt consolidation and credit card refinance is first a matter of goals.

With credit card refinancing — as with other forms of debt refinancing — the aim is to save money by lowering your interest rate. Debt consolidation may or may not save you money on interest, but will certainly simplify bills by replacing multiple credit card obligations with a single monthly payment and a structured payback schedule.

The other difference is that credit card refinancing typically utilizes a balance transfer credit card that has a 0% or low interest rate for a short time. This limits the amount you can transfer to what you can comfortably pay off in a year or so. Debt consolidation utilizes a personal loan, which allows for higher balances to be paid off over a longer payback period.

Which strategy is right for you? That depends on a number of factors, including the amount of debt you have, your current interest rates, and whether you’re able to stick to a structured repayment schedule.

The Takeaway

Credit card refinancing is when a borrower pays off their credit card(s) by moving the balance to another card with a lower interest rate. A popular way to do this is with 0% interest balance transfer credit cards. However, borrowers typically need a high credit score to qualify for these cards. Debt consolidation, on the other hand, is when a borrower simplifies multiple debts by paying them off with a personal loan. Personal loans with a fixed low interest rate and a structured payback schedule are a smart option for consolidating debts.

If you have a relatively small balance that can be paid off in a year or so, refinancing with a balance transfer credit card may be right for you. If you have a larger balance or need more time to fully pay it off, personal loans are available.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

Which is better: credit card refinancing or debt consolidation?

There are advantages and drawbacks to both strategies. Credit card refinancing can help you lower your interest rate, which can save you money. Debt consolidation might save you money on interest, but it will definitely simplify bill paying by replacing multiple cards with one monthly bill.

Is refinancing a credit card worth it?

Refinancing a credit card may be worth the effort because it can lower your interest rate, potentially save you money, and make payments more manageable.

Is refinancing the same as consolidation?

Though refinancing and consolidation can both help you manage your debt, they serve different purposes. Refinancing involves moving credit card debt from one card or lender to another, ideally with a lower interest rate. Paying less in interest while you pay off your debt is the main goal of refinancing. When you consolidate, you settle multiple debts with one loan. Simplifying bills into one fixed loan payment is the main reason to consider this strategy.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL-Q424-056

Portfolio margin is a way of calculating the margin requirements for derivatives traders using a composite view of their portfolio. Portfolio margin accounts offset investors’ positive and losing positions to calculate their real-time margin requirements. Portfolio margining may provide investors with lower margin requirements, allowing them to use more of their capital in trades.

Portfolio Margin, Defined

Portfolio margin is a type of risk-based margin used with qualified derivative accounts. It calculates a trader’s real-time portfolio margin requirements based on a risk assessment of their portfolio or marginable securities.

If a trader has a well-hedged portfolio they will have a lower margin trading requirement, allowing them to utilize more of their cash for trades and take advantage of more leverage. Of course the more margin a trader uses, the higher their risk of loss.

How Does Portfolio Margin Work?

Investors with qualified accounts where they trade derivatives including options, swaps, and futures contracts must maintain a certain composite-margin. Portfolio margin is a policy with a set of requirements that aim to reduce risk for the lender.

To determine portfolio margin, the lender consolidates the long and short positions held in different derivatives against one another. This works by calculating the overall risk of an investor’s portfolio and adjusting margin requirements accordingly.

The portfolio margin policy requirement must equal the amount of liability that remains once all the investor’s offsetting (long and short) positions have been netted against one another. Usually portfolio margin requirements are lower for hedged positions than they are with other policy requirements.

For example, the liability of a losing position in an investor’s portfolio could be offset if they hold a large enough net positive position in another derivative.

Margin vs Portfolio Margin

Here’s a closer look at how margin vs. portfolio margin compare when online investing, or investing with a broker.

Margin

Margin is the amount of cash, or collateral, that investors must deposit when they enter into a margin trade. Margin accounts work by allowing a trader to borrow money from their broker or exchange. By borrowing cash to cover part of the trade, an investor can enter into much larger positions than they could if they only used cash on hand.

Borrowing money, however, poses a risk to the lender. For this reason, the lender requires that traders hold a certain amount of liquid cash in their account to remain in margin trades. If a trader loses money on a position, the broker can then claim cash from the trader’s account to cover the loss.

Traditional margin loans under Regulation T require investors to put up a certain percentage of cash for margin trades based on the amount of the trade.

Portfolio Margin

Portfolio margin, on the other hand, calculates the required deposit amount based on the risk level of the investor’s overall portfolio. It looks at the net exposure of all the investor’s positive and losing positions. If a derivative investor has a well-hedged portfolio, their margin requirement can be much lower than it would be with traditional margin policies.

This chart spells out the differences:

Portfolio Margin and Volatility

Portfolio margin calculations take into account investing in volatile markets by factoring in the outcome of various scenarios.

Portfolio Margin Calculation

Calculating portfolio margin is a multi-step process. The calculation includes hypothetical market volatility and theoretical price changes.

The steps are:

1.    Create a set of theoretical price changes across the trader’s margin account. These ranges may be different when trading options, stocks, and indices.

2.    Divide the range and calculate the gain or loss on the overall position for each theoretical scenario.

3.    Incorporate implied volatility into the calculated risk array.

4.    Calculate the largest possible loss that could occur with each theoretical scenario. That amount is the margin requirement.

Recommended: Calculating Margin for Trading

Key Considerations

Portfolio margin can be a great tool for experienced investors who want to invest more of their available cash. However, there are some important things to keep in mind:

•   Margin trading tends to be risky and is not recommended for beginning traders

•   Traders must keep $100,000 net liquidating value in their portfolio margin account (this is not the same as a client’s margin account). If the account goes below this, they may lose their active trading positions and the ability to trade on margin.

•   Traders must get approval to enable margin trading on a brokerage account before they can utilize the portfolio margin rules.

If an investor’s margin balance falls below the margin requirement, they could face a margin call, which would require them to either deposit more cash or sell securities in order to increase their balance to the required amount.

Portfolio Margin Requirements

The Chicago Board of Options Exchange (CBOE) sets the rules for portfolio margin. In 2006 it expanded margin requirements, with the goal of better connecting requirements to portfolio risk exposure. Reducing the amount of portfolio margin required for lower risk investment accounts frees up more capital for leveraged trades, benefitting both the trader and the broker.

Brokers must use the approved portfolio margin calculation model provided by The Options Clearing Corporation (OCC), which is the Theoretical Intermarket Margining System (TIMS). TIMS calculates the margin requirements based on the risk of the portfolio on a daily basis.

To remain qualified for portfolio margin, investors must maintain a minimum of $100,000 net liquid value in their account.

There are additional requirements derivatives traders should keep in mind if they use leverage to trade. Regulation T is a set of regulations for margin trading accounts overseen by the Federal Reserve Bank.

Brokers must evaluate potential margin traders before allowing them to start margin trading, and they must maintain a minimum equity requirement for their trading customers. In addition, brokers must inform traders of changes to margin requirements and of the risks involved with margin trading.

The Takeaway

Margin trading may be very profitable and is a tool for investors, but it comes with a lot of risk and isn’t recommended for most traders. If you use margin trading for derivatives, however, portfolio margin may free up more capital for trading.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Photo credit: iStock/filadendron

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