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Credit Utilization

Credit utilization is an important indicator of your credit health. This guide will teach you what it is, how you can calculate it, how it affects your credit score, and what you can do to make it better.

credit utilization

What is my credit utilization ratio?

Your credit utilization ratio is the percentage of your available credit that you actually use. This ratio accounts for 30% of your credit score calculation and tells your future lenders about how you use your credit.

How do I calculate my credit utilization ratio?

Calculating your credit utilization ratio on your own is easy. Simply divide the sum of your current credit card balances by your total credit limit, then multiply by 100 to get your ratio as a percentage. Here are some examples:

Example 1:

Kelly has a balance of $300 on her only credit card. Her limit on the card is $1,500. To find her credit utilization ratio, she divides $300 by $1,500 to get 0.2. Then she multiplies 0.2 by 100 to get 20%.

Example 2:

Roger has 3 credit cards. Credit card 1 has a balance of $430 and a limit of $2,500. Credit card 2 has a balance of $925 and a limit of $4,000. Credit card 3 has a balance of $1,000 and a limit of $3,000. To find his credit utilization ratio for each card, he completes the following calculations:

Credit Card 1:

Roger divides $430 by $2,500 to get 0.172. Then he multiplies by 100 to get 17.2%.

Credit Card 2:

Roger divides $925 by $4,000 to get 0.23125. Then he multiplies by 100 to get 23.125%.

Credit Card 3:

Roger divides $1,000 by $3,000 to get 0.3333. Then he multiplies by 100 to get 33.33%.

Overall Credit Utilization:

First, Roger adds up all of his balances – $430, $925, and $1,000 – to get his total balance of $2,355. Then, he adds up all of his credit limits – $2,500, $4,000, and $3,000 – to get his total credit limits of $9,500.

Then he divides $2,355 by $9,500 to get  0.24789. Finally, he multiplies 0.24789 by 100 to get his total credit utilization ratio of 24.789%.

How does my credit utilization ratio affect my credit score?

Your FICO score and other credit scores used to evaluate your credit risk are determined, in part, by your credit utilization ratio.

1 of 5 factors

There are five main factors that credit bureaus use to calculate the credit score on your credit report, and they each affect your score to a different degree. Here’s how your score breaks down:

  • 35 percent: Payment history
  • 30 percent: Utilization
  • 15 percent: Age of credit
  • 10 percent: New credit
  • 10 percent: Types of credit

As you can see, your credit utilization is the second-most important factor when determining your credit score.

What it means to creditors

Creditors and lenders look at your credit utilization ratio as an indicator of your credit risk. If the ratio is high, they think it’s riskier to extend a credit line to you.

Lower the better: 30% rule

In general, a “good” credit utilization ratio is less than 30%. Anything higher than that can actually negatively impact your credit score. But lower is always better. And be aware that both the ratio on each card and your overall ratio matter.

In example 2 with Roger and his 3 credit cards, his overall credit utilization ratio is lower than 30% but one of his cards has a ratio higher than 30%. This is something to watch out for – it’s good to have an overall ratio lower than 30%, but if an individual account has a higher ratio, it can still affect your credit score.    

How do I improve my credit utilization ratio?

Pay mid-cycle

Usually, credit card account billing cycles require you to pay once per month. One way to keep your credit utilization low is to pay off your balance twice per month instead of just paying when the bill is due. This ensures that your balance is always a smaller percentage of your credit limit.

Increase your credit limit, but be careful

Many websites will tell you that requesting a higher credit limit from credit card issuers is a good way to decrease your credit utilization ratio. While this may be true mathematically, it’s a little more complicated in practice. Raising your limit can make you more likely to spend more than you usually would, so if you think you will be tempted to use up more of your limit, it might be best to skip this tip.

Want to fix your utilization the right way? Talk to a certified credit counselor to pay off your debt.

Create balance alerts

Some companies enable you to set up alerts that let you know when your balance is getting close to a certain limit. This can help you stay on top of how much you are spending on a certain card.

Keep credit accounts open even if you don’t use them

If you have a credit card that you haven’t been using much or at all, don’t close the account. It will help you keep your combined credit limits high while keeping your balances low.

Open new accounts, but not if you want a short-term boost

Opening new accounts will raise your overall credit limit, but in the short-term, it will lower your score. This is a good option if you are looking to decrease your credit utilization ratio and boost your score in the long-term. Be aware that this can have a similar impact on your spending to raising your limit on a current card.

Armed with this information about credit utilization, you have more understanding of and control over a factor that makes up a large part of your credit score. Remember to keep your balance low without raising your credit limits too high, and you may start to see your credit score improve.