Credit Utilization Ratio

Credit utilization ratio refers to the amount of available revolving credit a borrower is using compared to the total amount available to them. Credit utilization ratio is a major factor in determining your credit score. Experts recommend keeping your credit utilization ratio below 30% — and ideally below 10% — to boost your credit score.

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What Is Credit Utilization Ratio?

Your credit utilization ratio is a measurement of the amount of revolving credit you have access to compared to the amount you’re actually using at a specific time. This ratio, also called the debt-to-available-credit ratio or credit utilization rate, is the second most important factor influencing your credit scores.

Consider the FICO scoring model, generally regarded as the industry standard, in which your credit utilization ratio makes up 30% of your overall credit score:

FICO Credit Scoring Factors
  • Payment History — 35%
  • Balances Owed and Credit Utilization Ratio — 30%
  • Length of Credit History — 15%
  • Credit Mix — 10%
  • New Credit Inquiries — 10%

Why Does Credit Utilization Ratio Matter?

Your credit card company sets a credit limit, the maximum amount of money you can spend on the credit card without having to pay a penalty fee, for each open credit line you hold. Technically, you can use as much of this available credit as you want, but it’s unwise to “max out” your cards and invite a credit score penalty if you can avoid it.

Lenders look for low credit utilization rates as an indicator of a borrower’s creditworthiness and their likelihood of paying back loans on time. For borrowers, having too high a credit utilization ratio can directly negatively affect credit scores.

Keeping your credit utilization ratio low, on the other hand, shows potential lenders that you have a proven track record of managing credit responsibly.

Did You Know?
A study conducted by the Federal Reserve found that women ages 21-40 have a higher credit utilization ratio on average than men of the same age group.

Impact on Credit Score

Your credit utilization ratio has a sizable impact on your credit score, accounting for 30% of your FICO score and 20% of your VantageScore. While the exact impact differs according to the scoring model, using less revolving credit and working toward a lower credit utilization ratio will generally help boost your credit score.

If high credit utilization is lowering your credit score, it can become difficult to reach many personal finance milestones. For example, you may have trouble qualifying for mortgages or other loans and you may have to pay higher rates for loans and insurance policies.

While it’s best practice to keep your credit utilization as low as possible, it shouldn’t reach zero. Having zero credit utilization won’t paint you favorably to lenders. A potential lender wants to see that you’ve borrowed revolving credit before and that you know how to manage it responsibly, and having zero credit utilization can actually lower your credit score.

What Is a Good Credit Utilization Ratio?

Generally, experts advise keeping your credit utilization ratio under 30%. Creditors deem any higher percentage as “too high,” and you’re likely to see your credit score fall as your utilization rises over this threshold.

The closer your utilization ratio is to zero — without actually being zero — the better it is for your credit score. According to research from FICO, consumers with the highest credit scores had an average credit utilization ratio of just 7%.

Did You Know?
Americans held an average of 3.84 credit card accounts in the third quarter of 2020.
Source: Experian

How Can You Calculate Your Credit Utilization Ratio?

You can calculate your credit utilization ratio in a few simple steps.

First, ‌check the balances and credit limits of all your credit cards. You can find this information on your paper credit card statements or by logging in to your accounts online.

Let’s say you have only one credit card with an $8,000 limit and a balance of $2,000. The next step is to divide your balance by the credit limit. For this example, that number would be 0.25.

Finally, multiply the decimal you calculated by 100 to get the percentage that represents your credit utilization ratio. In this example, your credit utilization ratio would be 25%, falling ‌just under the recommended 30% limit.

Calculating Credit Utilization Ratio

Per-Card vs. Overall Utilization

Many credit bureaus and lenders don’t stop at your overall credit utilization. They also consider your per-card utilization. So if you have more than one open credit card, calculating your credit utilization ratio might be a bit more complicated.

For example, let’s say you have two cards, one with a $2,000 credit limit and one with a $6,000 credit limit. If you put $1,000 in purchases on each card, your overall credit utilization is only 25%. But your per-card utilization on the $2,000 limit card is 50%, which is high enough to result in a penalty to your credit score.

With this in mind, it’s best practice to use each of your credit cards every so often to spread out balances and ensure that no single card is too close to maxing out.

If you have credit cards you never use, you might think it’s a good idea to close those accounts — but closing them could be detrimental to your credit. Doing so will reduce your total credit limit, increasing your overall credit utilization ratio. Closing accounts also reduces the average age of your credit accounts, another important factor in calculating credit scores.

Instead, ‌keep those old cards around and swipe them every once in a while for small purchases. While it’s not an exact science, this will keep the accounts active on your credit reports while maintaining a low utilization rate and should keep your score higher than it would be by closing the card.

How Can You Improve Your Credit Utilization Ratio?

If you want to improve your credit utilization ratio to help boost your credit score, here are a few steps you can take:

How To Lower Your Credit Utilization Ratio
Increase Your Credit Lines
If you’re consistently using over 30% of your available credit, consider applying for an increase to your line of credit or a new credit card. But don’t make the mistake of applying for too much credit too quickly; this can trigger alarm bells for lenders and may actually end up lowering your credit score.
Pay Multiple Times Per Month
You can reduce the amount of credit you’re using at any one time by paying off your credit cards twice per month instead of once. This way, you can keep using the cards all month with less worry about the balances getting too high.
Spread Purchases Across Cards
When you have to spend a lot in one month, spreading the purchases across multiple credit cards will at least lower your per-card utilization ratio.
Consolidate Revolving Debt
If you’re trying to pay off credit card debt, consolidating it with a low-interest personal loan is an option. Remember that creditors do not count payments on installment loans when calculating your revolving credit utilization. With this method, you may also end up paying less interest on the debt if you shop around for a lower loan rate than offered by your credit card company.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: July 18, 2022

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