Your credit utilization ratio is an important number used in credit scoring. It tells you what portion of your available credit you’re using across all your revolving accounts, like credit cards and lines of credit.
To figure it out, just divide your total revolving debt by your total credit limit, and then multiply by 100 to convert it to a percentage.
Keeping your credit utilization low is a smart move for anyone working to get out of debt. In fact, this ratio makes up about 30% of your credit score. When you use only a small portion of your available credit, lenders see you as responsible and less risky. That can help you secure lower interest rates, higher credit limits, and smoother loan approvals.
Experts suggest aiming to keep your credit utilization below 30% — and if you can get it under 10%, you’ll be in great shape for achieving top credit scores.
Here are some strategies to help you improve your credit utilization and work toward getting out of debt:
• Pay down your balances to lower what you owe.
• Request higher credit limits on existing accounts — but do so carefully, as this may trigger a hard inquiry on your report AND lead to unnecessary spending.
• Spread purchases across multiple cards so no single card shows high usage.
• Make multiple payments each month to keep your balances low throughout the billing cycle.
• Keep old accounts open (as long as they don’t charge high fees) to add to your overall credit limit.
Using these tips can help you build a healthier credit profile.
Table of Contents
How to calculate your credit utilization ratio
To calculate your credit utilization ratio, add up your balances, then divide that number by the total of your cards’ credit limits. The formula to calculate credit utilization ratio is:
“Credit Utilization Ratio (%) = (Total Credit Balances / Total Credit Limits) × 100.”
“Total Credit Balances” is the sum of all balances on your revolving credit accounts (such as credit cards).
“Total Credit Limits” are the combined credit limits of all revolving accounts.
Follow these four steps to help you calculate your current percentage:
- Add up all revolving credit balances. The amounts owed on all credit cards and other lines of credit.
- Add up credit limits of all revolving credit accounts. The maximum amount you can borrow across all accounts.
- Divide the total revolving credit balance by the total credit limit. This gives you the decimal form of the credit utilization ratio.
- Multiply the result from Step 3 by 100. Convert the decimal into a percentage to express credit utilization.
What is a good credit utilization ratio?
Keeping your credit utilization below 30% is essential for a healthy credit score. In simple terms, if you have a $1,000 credit limit, try not to use more than $300 each month. Experts say 30% is the maximum you should aim for — not a goal to hit.
Ideally, you should pay off your balance completely every month, which keeps your utilization near 0%. However, carrying a small balance of about 1% to 10% can actually show lenders you’re using credit responsibly. By keeping your utilization low, you’ll be seen as a low-risk borrower, which can help you secure better interest rates and more favorable loan terms.
Why does higher credit utilization decrease your credit score?
Using too much of your available credit can hurt your credit score. Higher credit utilization signals to lenders that you might be having financial difficulties, which increases the risk you might not pay back your debts.
One of the main reasons for credit scores to drop is that high credit utilization signals to lenders that the borrower is over-reliant on credit.
That’s why about 30% of credit scoring is based on how much of your credit you’re using, or “amounts owed.” In short, if you rely too heavily on credit, lenders might cut back on new credit or lower your current limits, making it even tougher to manage your finances.
What Is credit card revolving utilization?
Credit card revolving utilization determines the amount of accessible credit used on revolving accounts.
Calculating credit card revolving utilization is the same as calculating credit utilization ratio. For example, if you have two credit cards, each with a $1,000 limit and a $500 balance, your total revolving debt amounts to $1,000, while the total available credit is $2,000. The revolving utilization rate is 50%.
Maintaining a low revolving utilization rate is essential to a healthy credit score. A 0% utilization rate is less beneficial than a small but nonzero rate, such as 1%, because credit scoring models look for evidence of managing credit responsibly rather than not using it at all.
Lenders look at revolving utilization closely when evaluating creditworthiness for new credit. High utilization leads to denials or higher interest rates due to the perceived higher risk.
What Is the ideal credit utilization ratio for improving credit scores?
The ideal credit utilization ratio for improving credit scores is below 10%. Keeping “credit usage” below 10% can enhance your score, demonstrating responsible credit management and low financial risk to lenders.
An ideal credit utilization ratio is a crucial strategy to increase credit scores because it directly influences one of the most critical components of credit score calculation. Financial experts increasingly advocate for maintaining credit usage well below the traditional 30% threshold to achieve an excellent credit score. This approach sends the message that you’re a low-risk borrower, leading to better interest rates and credit terms from lenders.
A lower credit score can limit your ability to obtain new credit, impacts the terms of credit that is extended, and can lead to higher annual percentage rates (APR), increasing the cost of borrowing. A good credit score is crucial because it reflects financial health and credibility.
How does credit utilization impact credit history?
Credit utilization impacts credit history because it affects your credit score, a key factor in credit history. Maintaining a modest credit utilization ratio shows you can be responsible with credit, which is in turn good for credit history.
- Low credit utilization indicates that the borrower is not overly reliant on credit and makes good use of available credit limits. Responsible credit behavior is recorded in credit history and helps build a positive reputation with lenders.
- High credit utilization makes lenders think borrowers are not likely to repay loans since they regularly use a large portion of their available credit. It leads to a lower credit score and adversely affects credit history.
Maintaining a low credit utilization ratio directly influences credit scoring — it is essential for establishing a positive credit history. Managing spending can help avoid high credit utilization.
Why is it important to keep track of the credit utilization on your credit cards?
Keeping track of your credit card usage is essential because it affects your credit score, financial health, interest costs, and even your chances of getting a credit limit increase. Effective credit utilization management shows lenders you’re managing your money wisely, which can lead to better rates and more financial opportunities.
By monitoring how much of your available credit you’re using, you can avoid overspending, keep debt under control, save on interest, and boost your overall creditworthiness.
Remember, your credit utilization ratio has a significant impact on credit scores. A high ratio, indicating that you’re close to maxing out credit limits, leads to a credit score drop. Basically, low utilization can lead to a higher score.
What are the benefits of maintaining a low credit utilization ratio?
The benefits of maintaining a low credit utilization ratio include:
- Improved credit score: A low credit utilization ratio can boost your credit score. Credit scoring models favor consumers who use less available credit.
- Increased creditworthiness: Maintaining a low ratio indicates to lenders that you’re not reliant on credit, increasing your chances of being approved for loans and credit lines.
- Better interest rates: Lower credit utilization leads to more favorable interest rates on loans and credit cards, which means paying less interest over time.
- Easier loan and credit card approvals: A lower ratio makes it easier to qualify for new credit. Lenders are more likely to approve credit applications if they believe you manage your current credit responsibly.
Financial flexibility: More credit is available in emergencies or for necessary major purchases with lower credit utilization.
Which credit utilization rate would be preferable to a lender on a credit card application?
Lenders typically look for a credit utilization rate below 30% — and aiming for 10% or less is even better. When you use only a small slice of your available credit, that lower credit utilization rate shows you’re not overly reliant on borrowed money and that you manage your finances wisely.
Responsible credit use through low credit utilization affects credit scores and influences lender confidence.
This disciplined approach boosts your credit score, makes you a lower-risk borrower, and can help you secure better interest rates and loan terms. Keeping your credit utilization low demonstrates you can manage financial obligations wisely and improves your chances of receiving favorable credit offers.
Which is the best way to lower credit utilization to an acceptable level?
Here are more tips and reminders for lowering credit utilization to a level that will help boost your creditworthiness…
- Pay down credit card balances early. Repaying debts before the statement period ends reduces the reported balance and the utilization rate — credit card issuers report the balance to credit bureaus at the end of each statement period.
- Request higher credit limits. If you’ve maintained a good payment history, recently improved your credit score, or your income has increased, consider requesting higher limits from card issuers. (This might lead to a hard inquiry on your credit report.)
- Keep reported income updated. Report any increase in income to credit card issuers. Higher reported income leads to increases in credit limits, which lower the credit utilization rate.
- Use installment loans to consolidate debt. Consolidating revolving debt, such as credit card debt and Home Equity Lines of Credit (HELOCs), into an installment loan can improve your utilization ratio, also offering a fixed interest rate and set repayment period.
- Open new lines of credit. Opening new credit accounts increases the total amount of credit available, which improves credit utilization ratios. WARNING: Do not open new accounts if you are already deep in debt, as this can make things worse.
- Don’t close old credit cards. The available limits add to the total available credit, so keeping them open helps the credit utilization ratio. Taking advantage of “credit age” is also a common strategy in credit repair methods to enhance credit profiles and scores.
How does credit consolidation impact your credit utilization ratio?
Credit consolidation impacts your credit utilization ratio by lowering it, of course! Consolidating multiple balances into a single loan — typically one with a higher total credit limit — creates room in your available credit while helping you pay down debt faster with a lower interest rate and fixed payment.
Consider this scenario: Your credit utilization ratio is 50%, and you have a $100 balance across two accounts with a combined $200 limit. You can effectively redistribute your debt by taking out a $400 consolidation loan to cover and surpass the current debt. The setup increases the total credit allowance while keeping the debt level the same (or reducing it), thus lowering the utilization ratio to 25%.
Reduced credit utilization through credit consolidation means using a smaller percentage of available credit.
What does “100% credit available” mean?
On the other side of the coin, having 100% credit available means you’re not using any of your credit limit — either you’ve paid off your balance completely or you haven’t used your card at all. In other words, a credit utilization rate of 0% shows that none of your available credit is in use.
While keeping your credit fully available requires careful financial management, paying off your balance in full each month makes it achievable and can strengthen your financial stability over time.
Does credit utilization matter if you pay in full?
Yes, credit utilization still matters, even if you pay your balances in full on time. Paying off credit card balances in full as often as possible keeps interest from building up. In addition to that, lenders report your utilization ratio to the credit bureaus at the end of the billing cycle, which does not necessarily coincide with the payment date.
High utilization reported to the credit bureaus harms credit scores, regardless of how much you pay off each due date. For example, the reported utilization is high if you constantly use a large portion of your credit limit before paying it off at the end of the month. Financial institutions see high utilization rates unfavorably, even if the balance is not carried over from one month to the next, because it indicates a reliance on credit.
Keeping the balance low all month or making multiple payments to pay it down before the reporting deadline helps prevent utilization from harming a credit score.
