Everything you need to know about credit utilization ratio

When you’re looking for ways to improve your credit score, addressing your credit utilization ratio is one of the best places to start. So, what is a credit utilization ratio? It’s a percentage representing the amount of credit you’re using compared to your revolving credit limits. A low credit utilization is associated with good to excellent credit scores and responsible credit use. Conversely, a high credit utilization might mean you’re closer to maxing out your credit cards and can often result in a lower credit score. 

Understanding how credit utilization works, the impacts to your credit score and how to calculate your credit utilization ratio is an important part of managing your credit. We’ll take a deeper look at what credit utilization is, show you how to lower your utilization rate and ways to keep track of it. 

What is a credit utilization ratio?

If you’re reviewing your credit report and see the term ‘credit utilization,’ you might be wondering what that even means and what it has to do with your credit score. Credit utilization is a credit scoring factor that makes up 30 percent of your FICO credit score and is also considered “highly influential” to your VantageScore. 

It looks at how much you owe across all open revolving lines of credit (such as credit card accounts and home-equity lines of credit) and compares that to your total credit limit. If you have more than one credit card, your credit utilization ratio generally refers to the amount of debt you are carrying on all your credit cards and is usually expressed as a percentage.

That said, it’s important to remember that credit utilization is measured in two ways — individually and collectively. Having 90 percent credit utilization on one of your cards won’t reflect well on your score, even if your overall credit utilization across all accounts is much lower. That’s why it’s always a good idea to know what your balances are on all your cards and work to keep everything as low as possible.

What is a good credit utilization ratio? 

Most credit experts advise keeping your credit utilization below 30 percent to maintain a good credit score. This means if you have $10,000 in available credit, your outstanding balances should not exceed $3,000. It’s all right to occasionally make purchases that exceed 30 percent of your available credit, as long as you pay them off within your grace period and avoid turning them into revolving balances or long-term debt. 

Keeping your utilization ratio low is ideal, but you may not want to bring it all the way to zero — and those with excellent credit usually don’t. A credit utilization rate of zero percent shows credit reporting agencies that you’re not using your credit limits at all rather than using them responsibly. On average, people with exceptional credit scores of 800 to 850 had a credit utilization of just over 7 percent, according to a 2023 Experian report.

In a nutshell, keep your credit utilization below 30 percent and above 0 percent to aim for excellent credit.

Also, credit utilization can vary widely from month-to-month. Depending on what information hits your credit report regarding your credit balances, the score you see today could be different than what you see tomorrow. If you make a large purchase but pay it off fairly quickly, your utilization will go down once that payment hits your credit report.

How does your credit utilization ratio affect your credit score?

Under the FICO scoring model, there are five factors that affect your credit score. Each factor makes up a percentage of your total score, as follows:

• Payment history: 35 percent
• Credit utilization: 30 percent
• Length of credit history: 15 percent
• Credit mix: 10 percent
• New credit: 10 percent

Credit utilization isn’t as heavily weighted as your payment history, but your credit utilization ratio is still the second-most important factor affecting your credit score. If you are trying to build good credit or work your way up to excellent credit, you’ll want to keep your credit utilization low. In other words, keep your available credit as high as possible and your debts as low as possible. Running up high balances on your credit cards raises your credit utilization ratio and can lower your credit score.

How can you calculate your credit utilization ratio?

If you have some basic math skills, you can learn how to calculate your credit utilization. Just divide the amount you owe on a credit card by its credit limit, and you’ll get your utilization rate for that card. Don’t want to do the math? Check out Bankrate’s credit utilization ratio calculator.

To better understand how your individual utilization rate is calculated, let’s run through an example: If you spend $500 on a credit card with a $5,000 credit limit, that equals a 10 percent utilization rate (500 divided by 5,000 equals 0.10, or 10 percent). This is the percentage of the credit used out of the total amount of credit offered by your credit card company. 

But that’s just for one credit card. To calculate your overall credit utilization, start by adding up all the credit limits on your credit cards. If you don’t know your credit limits, you can find them by logging into your credit card accounts. Next, add up your current credit card balances. Divide your debt by your credit limits, then multiply that number by 100 to get the percentage of credit you’re currently using, as shown below.

Doing the math on your own is commendable, but you don’t have to. Instead, sign up for a credit monitoring service that automatically calculates your credit utilization ratio for you. Try these three free credit monitoring services to track your credit utilization: 

1. Experian credit monitoring
2. Capital One CreditWise app
3. myFICO credit score monitoring

For example, Capital One CreditWise recalculates your credit utilization ratio every week and alerts you of any changes that have a negative or positive effect on your credit score. CreditWise is also free and available to everyone regardless of whether you have a Capital One credit card

How can you lower your credit utilization ratio?

Lowering your credit utilization ratio is relatively easy — and it’s one of the quickest ways to boost your credit score. Here are four ways for you to reduce your debt, increase your available credit and reap the benefits of a lower credit utilization ratio:

Pay off your balances

The best way to lower your credit utilization ratio is to pay off your credit card balances. That’s easier said than done in some cases, but every dollar you pay off reduces your credit utilization ratio and your total debt, which makes it a win-win scenario. 

Plus, paying off your balances means no longer having to pay interest on those balances. So, calculate how much debt you can pay off in the next few months, and see how it affects your credit utilization and credit score. 

Open a balance transfer credit card

If monthly interest charges are making it difficult to put a dent in your debt, you might want to consider a balance transfer credit card. These cards let you transfer and consolidate your outstanding balances onto a single credit card, which often makes it easier to pay down your debt. The best balance transfer credit cards offer an introductory 0 percent APR period of 12 to 21 months to help you pay off your balances interest-free.

There’s one more benefit to opening a balance transfer credit card: When you take out a new line of credit, you increase the amount of credit under your name. This can help you lower your credit utilization ratio, provided you don’t make additional purchases that take up a significant percentage of your total credit.

Request a credit limit increase

Another good way to lower your credit utilization ratio is to request a credit limit increase from your credit card issuer. By increasing your credit limit, you’ll have more available credit on your account, which will automatically lower your credit utilization ratio. Just be careful that you don’t turn your new credit into new debt!

Apply for a new credit card

Getting a new credit card is also a good way to lower your credit utilization ratio. Having multiple credit cards associated with your account increases the amount of credit available to you, and if you don’t increase your overall spending, your credit utilization ratio should go down. Plus, applying for a new card gives you the opportunity to take advantage of credit card rewards, sign-up bonuses and other perks you didn’t have before.

Debt consolidation loan

If you have more than one credit card with a high balance, it can be challenging to make significant progress on lowering your utilization (and your debt) using the previous methods. Instead of a balance transfer card or requesting a limit increase, you might consider a debt consolidation loan instead. 

This allows you to pay off your credit cards with the loan proceeds and then repay the single loan under a fixed interest rate and fixed monthly payment. You’ll likely have a higher monthly payment with a debt consolidation loan, but you’ll pay off your debt more quickly than just making the minimum payments on your credit cards.

FAQs

• Is per-card or overall utilization more important?
  

  Both per-card and overall credit utilization are equally important to your credit score. For example, if you have an overall credit utilization of 20 percent with five cards, but you’re at a utilization ratio of 95 percent on one card, it will still negatively impact your credit score. Your credit score would also take a hit if your balance was distributed across each of your five cards and exceeded a 30 percent overall utilization ratio.

• Why is high credit utilization bad?
  

  A high credit utilization typically means you are close to maxing out your credit cards, and that signals trouble to lenders. Credit scoring exists to give lenders an idea of how much risk they are taking by issuing you credit. And if you are regularly maxing out your credit cards or not paying your credit card bill in full each month, this sends a signal to lenders that you may be in trouble financially.

   

• How can I improve my credit utilization ratio?
  

  There are a number of both active and passive steps you can take, including:

  • Pay down or pay off your revolving credit lines
  • Once you pay it off, don’t close your credit card unless absolutely necessary
  • Apply for new credit
  • Apply for a credit limit increase
  • Do a balance transfer with a 0% APR card
  • Consider a debt consolidation loan

  It’s a good idea to keep available credit in your arsenal. You can pay your cards off each month to keep your credit usage and your overall ratio low. You can also apply for new credit, which will improve your ratio if granted. Even so, don’t apply for new credit if you don’t otherwise need it.

   

• Does 0% utilization hurt your credit score?
  

  Yes, 0 percent utilization could hurt your score, but it’s highly unlikely you’ll have a 0 percent rate if you’re using your card at all.

  That’s because issuers report your utilization to the credit bureaus at a specific time each month, often soon after your statement closes. Therefore, if your statement closes with a $1,000 balance on a card with a $10,000 limit, the bureaus will see that you have 10 percent credit utilization. If you then pay off the card in full before your statement due date to avoid interest, your reported utilization is still 10 percent. You do NOT need to carry a balance to build your credit.

  It can reflect badly on your score if you consistently (more than three months) have a utilization rate of zero percent because you’ve opened cards and aren’t using them at all. That indicates to credit reporting agencies that you’re not using your credit limits at all rather than using them responsibly.

  The damage to your score isn’t drastic if you just have one month at zero. But using your revolving credit in measured, smart ways can keep your score looking its best.

   

The bottom line

Focusing on improving your credit utilization ratio is an effective way to boost your credit score. Calculating and keeping track of your credit utilization ratio doesn’t have to be complicated either. By using a credit utilization calculator or credit monitoring service, you can easily see your utilization ratio and take steps to keep it as low as possible. 

You can lower your credit utilization by paying down credit card debt, requesting a credit limit increase, doing a balance transfer or getting a new credit card. As your debt gradually gets smaller, you should see the benefits reflected in your credit utilization ratio and your credit score.