Your credit utilization ratio, or credit utilization rate, is the amount of available credit you have versus how much you’re currently using. It primarily refers to revolving credit — lines of credit and credit cards — since these have an upper limit but the balances can change based on your usage. It is a key factor in maintaining a good credit score.
Knowing how credit utilization works and how it’s calculated is important, especially if you’re trying to improve your credit score or want to qualify for better financing.
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- Credit utilization rate refers to the percentage of your available credit that you are currently using.
- This rate is calculated by dividing your total credit balances by your total credit limits.
- Your credit utilization rate is an important factor in determining your credit score.
- Lenders will use your credit utilization ratio to figure out how you manage debt.
- To improve your credit utilization ratio, you’ll either need to pay down some of your debt or increase your credit limits.
How to Calculate Credit Utilization Ratios
There are two ways to calculate your credit card utilization ratio:
- Per-card utilization: Divide your current balance for one credit card by that card’s credit limit. For example, if your credit limit is $1,000 and your balance is $250, your per-card utilization ratio is 25%. This means you’re using 25% of your available credit for that card.
- Overall utilization: Add up your total balance for every credit card or open line of credit and divide it by your total credit limit across all open revolving accounts. If your total balance across all accounts is $1,000 and your total balance is $750, then your overall credit utilization rate is 75%.
If you have a habit of maxing out your credit cards, your credit utilization will be high. Having high credit utilization could decrease your chances of getting new types of financing, such as loans or other credit cards.
Track Your Revolving Lines of Credit
It’s important to keep track of all of your revolving credit lines since each one adds to your overall credit utilization ratio. Every credit card also has a per-card utilization rate, which is based on that card’s balance and credit limit.
Say, for example, you have two credit cards with a zero balance and a third that’s been maxed out. Your overall credit utilization will be higher due to that one card. However, the other cards’ credit limits will also affect your credit utilization rate.
Here’s how this might look (per credit card account):
- Credit card one — $5,000 credit limit with a $0 balance equals 0% credit card utilization
- Credit card two — $3,000 credit limit with a $0 balance equals 0% credit card utilization
- Credit card three — $15,000 credit limit with a $13,000 balance equals 87% percent credit card utilization
Although the per-card utilization is zero on two of the cards, all three cards affect your overall utilization percentage. The combined, or overall, credit card utilization is nearly 57%.
According to Experian, the average person’s utilization rate was 25.6%. Typically, it’s good to keep your credit utilization at or below 30%.
Pro tip: Remember that many credit cards come with an annual fee and monthly compounding interest rates. If your credit utilization is already on the higher side, these extra fees could cause it to go even higher.
Your Credit Utilization Rate is Usually Reported Once a Month
Credit card issuers usually report your balance or payment activity to the credit bureaus once a month. However, there’s no specific date that they must do this. Because of this, any recent activity might not show up on your credit report.
This means that if you paid your bill off in full on the third but your credit card company reports your credit utilization on the first, your payment will not be reflected on your credit report until the next month.
This can be frustrating if you’ve already paid off a card — or drastically reduced the balance — but it isn’t reflected on your credit report. The good news is that your lowered credit utilization rate will eventually be updated. Once it is, it could also cause your credit score to improve.
READ MORE: Why did my credit score drop?
How Does Credit Utilization Work?
If you want a better understanding of your credit score, you need to first understand how your credit utilization rate works. When you get a new credit card or line of credit, it comes with its own credit limit — the maximum amount you can use from that account.
Your new credit card (or line of credit) will come with a zero balance because you haven’t used it to pay for anything yet. But with every purchase you make, you’re adding to your balance.
The difference between your current balance and your credit card limit is called “available credit.” Your credit utilization ratio is the percentage of your total credit limit that you’re using.
The higher your balance on your credit cards, the higher your credit utilization rate and the less available credit you have. Creditors typically prefer to work with people with a low credit utilization ratio, so keeping yours as low as possible is good.
Pro tip: Installment loans like personal loans, student loans, or mortgage loans, are not included in your credit utilization ratio. This is because they’re not a form of revolving credit. Unlike lines of credit and credit cards, installment loans come with a fixed balance and end date (provided you make all payments on time).
What’s Considered a Good Credit Utilization Ratio?
As a general rule of thumb, try to keep your credit card balances below 30% of the total credit limit. This will give you what’s considered a “good” credit utilization ratio. It will also keep your total available credit high, which shows lenders and credit card companies that you have good money management habits.
However, having a lower credit utilization rate is also good. Keep your credit card balances below 10% of your total credit limit if possible. Doing this will be very helpful to your credit score. Plus, it can make it easier for you to pay off your balances while reducing how much you pay in interest fees.
Pro tip: The best option is to keep your credit card balances at zero. You can do this by paying the balance in full every month or not using the cards at all. This also applies to any personal lines of credit you might have.
The Consumer Financial Protection Bureau (CFPB) reports that there are many myths surrounding the idea of credit utilization and building credit. One common misconception is that carrying a balance on your credit cards each month will improve your credit. In reality, having a zero balance can be more beneficial to your credit score and wallet.
Credit Score Impact
Your FICO score is calculated using the following factors:
- Credit utilization (30%)
- Payment history (35%)
- Credit history length/average age of all open accounts (15%)
- New credit or hard inquiries (10%)
- Credit mix (10%)
Your VantageScore credit score is calculated using the same factors, though they’re not weighed on a percentage basis. In both scoring models, your credit utilization is the second-highest factor contributing to your credit score.
That’s why it’s so important to keep your utilization rate low. With low credit utilization, you can more easily build good or excellent credit. But with high credit utilization, you could end up hurting your credit score.
Payment history is the most important factor in your credit score. This includes credit card payments. By making on-time payments, you can build a good payment history. Plus, paying off the full balance before the next billing cycle can reduce your overall debt and help you qualify for better interest rates when you borrow.
You’re entitled to a free annual copy of your credit report from all three credit bureaus — TransUnion, Experian, and Equifax. Request your credit report and review it to see if there are any areas you could improve. Check for any errors that might bring down your credit score, too. If you find any, dispute them with the reporting bureau.
Signing up for a credit monitoring service is also a good idea. Many credit card companies offer free credit monitoring through an app or online account. This can be beneficial if you’re trying to track your utilization ratio across multiple credit cards.
READ MORE: How to get a free credit score
5 Ways to Improve Your Credit Utilization Rate
Here are five smart ways to improve your credit utilization ratio.
Pay Off Your Balance
Try to pay off your credit card balances in full each month. If that’s not possible, try to pay more than the minimum. Not only will this reduce your credit utilization ratio, but it will also save you money on interest charges. It will also help you get out of credit card debt faster.
Along with this, avoid using your credit cards as much as possible.
Raise Your Credit Limit
Some credit card companies will automatically raise your credit limit, especially if you’ve been keeping your utilization rate low and making on-time payments. But if you want a credit limit increase sooner, contact the company and ask for one. A higher credit limit will reduce your overall and per-card credit utilization.
For example, say your current credit limit is $5,000 and your balance is $2,500. This means your credit card utilization ratio is 50%. If your card issuer approves a higher limit of $10,000, your new utilization rate is 25%. Try to keep your balance the same so it can positively affect your credit score.
Consider a Balance Transfer Card or Apply for a New Card
Applying for a new credit card with a new credit limit can also decrease your overall credit utilization ratio. However, you might see a slight dip in your credit score due to the hard inquiry that comes with applying for a new account. This drop is usually temporary.
Consider applying for a balance transfer credit card with a low or 0% APR. This will still add to your total available credit and reduce your credit utilization. But you’ll also be able to transfer the balance of a high-interest credit card to one with a lower interest rate, which could save you on interest payments.
When shopping around for the best credit cards, look for low interest rates, cash-back rewards, and low-interest promotional periods. Try to find a card with no annual fees.
READ MORE: Best balance transfer credit cards
If you have good credit already, a debt consolidation or personal loan is another option to consider. Debt consolidation lets you combine high-interest credit card debt into one loan, usually with a lower interest rate and a fixed monthly payment. This could clear your different lines of credit or credit cards while making it easier to manage your debt.
READ MORE: How does debt consolidation work?
Keep Your Accounts Open
Keep your revolving accounts — credit cards and lines of credit — open even after you’ve paid them off. Closing them will lower your available credit and potentially increase your credit utilization rate. The average age of your accounts also affects your credit score — the older your accounts are, the better.
Some credit card companies will automatically close accounts that have been inactive for too long. To avoid this, make a small purchase using these accounts every few months or so. Make sure you pay off the balance before the next billing cycle to avoid interest charges.
READ MORE: Does debt consolidation close credit cards?
The Bottom Line
Your credit utilization has a major impact on your credit score. It also affects your chances of qualifying for other forms of financing in the future.
If you want to improve your credit score, try to keep your credit utilization as low as possible. You can do this by paying down your current balances, asking for a credit limit increase, or applying for a new credit card or line of credit.
A rate of 10% is clearly better. If you anticipate needing a new credit card or a major loan, you should keep your credit utilization rate lower than 30%. That’s the threshold preferred by most lenders.
High utilization will affect your credit score as long as your utilization rate is high. You’ll need to lower your utilization rate to improve your score. This might take some time — usually around 30 days after making a change — since credit card companies don’t always report new activity right away.
It will depend on several factors, including whether the score you are tracking is a FICO score or a VantageScore. These are the two primary credit scoring models. Your credit utilization makes up 30% of your overall FICO credit score. It also has a high impact on your VantageScore. Lowering your overall utilization can improve your score, but the improvement will be based on several factors, including the credit score you start with.