Your credit utilization ratio is the measure of how much total available credit you have compared to how much you’re using at any given time.
As a general rule, a good credit utilization ratio is anything below 30 percent, but you should aim for even lower if you can.
What is a credit utilization ratio?
Credit utilization refers to the amount of your credit debt versus your overall credit limit. This figure is the second most important factor in determining your credit score, accounting for 30 percent of your score.
Because it’s such a significant factor in calculating your credit score, a good credit utilization ratio can score you better interest rates and increase your chances of qualifying for new credit. Likewise, a bad credit utilization ratio can have the opposite effect, driving up your interest rates and making it tough to qualify for loans or other forms of credit.
Why does credit utilization ratio matter?
To understand why credit utilization is important, it helps to understand the purpose behind credit scores. Creditors use credit scoring models to determine how likely someone is to pay their bills late or default on a loan.
A number of factors go into this credit score calculation, and each one helps creditors assign a level of risk to an individual consumer. Data shows that people who resort to using a bigger chunk of their available credit are at a higher risk of defaulting or running late on payments.
Creditors may also identify a high credit utilization rate as a sign someone is living beyond their means or using credit unwisely. They view an overreliance on credit as a red flag, and they’re less likely to extend you credit if they suspect you can’t manage your financial obligations.
How much does credit utilization affect credit score?
Your credit utilization ratio accounts for 30 percent of your credit score. Among the five factors that make up your score, credit utilization is second only to your payment history.
- Payment history (35%) – Whether you pay your bills on time.
- Credit utilization (30%) – How much credit you have versus how much you use.
- Credit history (15%) – How long you’ve used credit.
- Credit mix (10%) – How many various types of credit you have.
- New credit (10%) – How often you’re applying for new credit.
Because 30 percent of your credit score is determined by your credit utilization, it’s important to do whatever you can to keep your utilization ratio as low as possible.
How credit utilization works
Credit utilization is a pretty straightforward concept. You can find out what yours is by dividing what you owe by your available credit limit.
If you have more than one credit card, you can also calculate your credit utilization ratio for all your cards.
If you don’t know your current credit card limits, there are a couple of ways to find out. You can look at a credit card statement, check your account online, or contact the credit card company and ask them directly.
How is credit utilization calculated?
Even if you’re not particularly savvy when it comes to math, you shouldn’t have any trouble calculating your credit utilization ratio. All you need to do is divide your balance by your credit limit and then multiply by 100.
For example, assume you have three credit cards: Card A, Card B, and Card C.
| Balance | Credit Limit | |
| Card A | $250 | $2,000 |
| Card B | $750 | $6,000 |
| Card C | $3,000 | $12,000 |
| Total: | $4,000 | $20,000 |
To calculate your credit utilization rate, divide the balance ($4,000) by the credit limit for all three cards ($20,000) to get 0.2. Then multiply 0.2 by 100 to get 20 percent.
What is a good credit utilization ratio?
Popular opinion says you should strive to keep your credit utilization ratio below 30 percent. However, a FICO study found that people with credit scores 750+ had an average credit utilization ratio of around 10 percent.
Thus, the lower you can get your credit utilization rate, the better. On the other hand, it’s probably best to avoid a 0 percent credit utilization ratio.
This might seem counterintuitive but there is a good reason to keep your utilization from dropping to zero. If creditors see a 0 percent utilization rate, they might assume you don’t use credit at all or only use it sporadically.
What is a bad credit utilization ratio?
To avoid hurting your credit score, you should aim to keep your credit utilization ratio below 30 percent. However, just because your utilization rate goes to 31 percent or a bit higher doesn’t mean your score will drop significantly.
Keep in mind that your credit utilization ratio fluctuates over time. In addition, the “30 percent rule” is more of a guideline than a hard limit.
On the other hand, the higher your ratio goes the worse it is for your score. This is why financial experts suggest a 30 percent or below ratio as a general goal.
Per-card vs. total utilization
Credit scoring models consider both your per-card utilization ratio and your total utilization ratio. This means they look at how much you owe on each individual card as well as what you owe across all cards as a whole.
This is why you should try to maintain a good credit utilization rate for every card along with a good rate overall. For example, if you max out a credit card but have a good credit utilization ratio across the rest of your cards, creditors can still see the maxed-out card and could deny you credit as a result.
6 effective strategies for improving your credit utilization ratio
The good news is there are plenty of things you can do to improve your credit utilization ratio and boost your credit score. Here are six strategies to consider.
1. Keep old credit cards open
If possible, avoid closing old credit cards, even if you no longer use them. When you close an old credit account, you reduce your available credit limit, which can make your utilization ratio go up.
An exception here is a high annual fee or monthly maintenance charge. If a credit card is costing you money, it’s probably best to close the account and find other ways to improve your credit utilization.
2. Ask for a limit increase
In some cases, improving your credit utilization ratio is as simple as asking your credit card company to give you a higher credit limit.
3. Make two payments per billing cycle
Credit card companies report their cardholders’ balances to the credit bureaus once per billing cycle, which is once every 28 to 31 days. If you wait until your card’s billing due date to make a payment, this can make it appear as though you carry a large balance from month to month.
You can avoid this by making double payments each billing cycle. Alternatively, you can ask your credit card company when it reports to the credit bureaus and then do your best to submit your payment in advance of that date.
4. Use balance alerts
Depending on your credit card issuer, you may be able to set up balance alerts that send you a notification any time you approach a specific balance on a credit card. This can help stop you from using too much of your available credit.
5. Pay off credit cards with a personal loan
In some cases, you can improve your credit utilization ratio by paying down credit card debt with a personal loan. Unlike credit card debt, which is revolving, personal loans are installment accounts and don’t affect your revolving utilization rate.
If you use this strategy, however, it’s important to do so with care. Make sure you can afford the loan payments, as falling behind on an installment loan can negatively impact your credit score.
6. Open a new credit card
You can also try increasing your available credit by opening a new credit card. This can help improve your credit utilization ratio by expanding your untapped credit.
However, this strategy has a potential drawback. Applying for new credit can mean racking up hard inquiries on your credit report.
While one or two hard inquiries are unlikely to seriously hurt your credit score, multiple hard inquiries can do more damage. When creditors see that you’ve applied for several new accounts in a short period of time, they can view this as a sign that you’re unable to handle your finances.
Also keep in mind that opening a new card will count as new credit, which makes up 10 percent of your credit score. If you take on too much new credit all at once, this can hurt your score.
Conclusion
Your credit utilization ratio is second only to payment history when it comes to determining your credit score. Because it’s such an important factor in calculating your score, it’s important to make sure you keep your utilization rate as low as possible.
