What is a credit utilization ratio?

Understand how credit utilization is calculated and its impact on your credit score

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What do you prioritize most?

man looking at credit score on laptop screen

When it comes to credit scores and overall creditworthiness, several factors play a role in where you stand. These criteria vary slightly across the different scoring models used by FICO and VantageScore, but each model considers fundamental information like your payment history, how much debt you carry, the types of credit you use and how much new credit you have.

That said, some factors matter a lot more than others when determining credit scores, and one of these critical factors is your credit utilization ratio. Fortunately, credit utilization is an area of your credit where you do have some control. In fact, you can take several steps to improve it if you're willing to put in the work.


Key insights

  • Credit utilization is a term used to describe how much debt you have in relation to your available credit limits.
  • Most experts recommend keeping credit utilization below 30% for the best results for your credit score, which means never owing more than $3,000 on a revolving credit limit of $10,000.
  • You can improve your credit utilization by paying down debt, obtaining higher credit limits or both.

What is credit utilization?

While credit scoring models may use terms like "amounts owed" and "balances" to describe how much debt you owe, the most common term used to describe this factor is “credit utilization.” The Consumer Financial Protection Bureau (CFPB) defines it as "the amount of credit you have versus the amount you’ve used."

Credit utilization is a fluid factor in some ways. The amount you owe on your credit cards can fluctuate over time and even throughout a single billing cycle. Also, be aware that, just like your payment history and other credit factors, credit utilization is typically only reported to the credit bureaus once per month, when your billing cycle ends.

Why is credit utilization important?

Credit utilization is a major determinant of credit scores. The CFPB says a lower credit utilization shows lenders that you're responsible and in a position to avoid maxing out your limits or overborrowing. On the flip side, a higher credit utilization ratio tells lenders you're at a higher risk of default or may be strapped for cash.

» MORE: What is a negative credit history and how to fix it

How is credit utilization calculated?

Credit utilization is calculated by taking your total revolving credit balances (for products like credit cards and lines of credit) and dividing them by your total revolving credit limits.

For example, say you have three credit cards: one with a credit limit of $5,000, the second with a limit of $3,000 and the third with a limit of $2,000. In this case, your total credit limit would be $10,000.

If you owe $5,000 total across all three credit cards, then your credit utilization ratio is 50%.

$5,000 / $10,000 = 0.5

You can also have a per-product credit utilization ratio. If you owe $4,000 on a single credit card with a $10,000 limit, your credit utilization ratio for that card is 40%.

What is a good credit utilization ratio?

According to Lamine Zarrad, founder of a credit-building app called StellarFi, regularly tracking your credit utilization rate helps you manage it and keep it at a minimum. Zarrad also agrees with the standard recommendation of keeping credit utilization below 30% for a chance at the best possible credit score.

For the best possible credit score, keep your credit utilization below 30%.

While maintaining a good credit utilization of 30% or below can be easier if you have high credit limits to begin with, the same task becomes more difficult when your credit limits are on the low end. This is especially true if you have a starter credit card with a low limit like $300 or $500, which is relatively common.

Unfortunately, if you want to keep utilization below 30%, having a credit limit of just $300 means you can never owe more than $90 on your card when your balance is reported to credit bureaus. However, there are steps you can take to have a good credit utilization rate even as you use your card throughout the month.

"One way to do this is to pay off some or all of your credit card bill as soon as you see it reaching the 30% limit," said Zarrad. "This way, any new credit gets reported as a fresh utilization rate."

» MORE: How to build credit with secured credit cards

How credit utilization affects credit scores

Zarrad says keeping your credit utilization ratio low shows you are not overly reliant on credit and "have better control over your finances."

Of course, the opposite is also true, and a higher credit utilization ratio shows lenders you may be borrowing too much — or at least be on a path to doing so.

While payment history is the most important factor of both FICO and VantageScore credit scores (making up 35% and 41% of their latest scoring models, respectively), both companies also put considerable weight on your credit utilization:

  • FICO uses “amounts owed” to determine 30% of your credit score.
  • VantageScore uses credit utilization to determine 20% of your score and “balances” to make up another 6% to 11% of your score, depending on the scoring model used.

» MORE: What is a good credit score?

Ways to improve your credit utilization ratio

Your ability to improve your credit utilization ratio will depend on your willingness and bandwidth to pay down your current debts and whether you have the credit score required to get approved for more credit.

Apply for another credit card

Getting approved for another credit card will instantly lower your credit utilization since you'll have more available credit right away. Just remember that your utilization will only stay lower if you avoid racking up new debt on that card.

Ask for higher credit limits

You can also call the number on the back of a credit card you already have to request a higher credit limit. If your card issuer grants your request, your credit utilization ratio will drop immediately.

Make a payment right before your statement closing date

Erik Beguin, founder and CEO of Austin Capital Bank, says you can instantly improve your credit utilization ratio by making a payment on your credit card right before its statement closing date, regardless of when your payment due date is.

"The statement date is what most lenders use to report credit to the credit bureaus," he said.

Pay down debt over time

The steps we suggest above may only improve your credit utilization in the short term; improving this factor in the long term requires you to treat debt differently. For example, you can make sustained improvements to your credit utilization by paying down debt and using credit cards for purchases less frequently going forward.

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FAQ

Will closing unused credit accounts improve my credit utilization?

Closing a credit card account you're not using can help you in some ways, including reducing the potential for more debt and helping you avoid identity theft and fraud. However, this move decreases the amount of available credit you have, so it will increase your credit utilization ratio.

Closing a credit card account can also decrease the average length of your credit history, which is another factor that impacts credit scores.

Is it better to have high or low credit utilization?

It's better to have a low credit utilization ratio. Not only can maintaining low credit utilization help your credit score, but it also means you have less revolving debt and are paying less in interest.

How can I monitor my credit utilization ratio?

You can monitor your credit utilization ratio by logging into your revolving credit accounts to see how much you owe in relation to your credit limits. From there, divide your total revolving account balances by your combined limits on those accounts. The percentage you get is your total credit utilization ratio.

Bottom line

Your credit utilization can impact your life in more ways than one, including your overall credit health and how much interest you pay. Most experts suggest keeping your utilization below 30% for the best results for your credit score.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. FICO, " What's in my FICO Scores? " Accessed Aug. 8, 2023.
  2. VantageScore Solutions, " The Complete Guide to Your VantageScore ." Accessed Aug. 8, 2023.
  3. Consumer Financial Protection Bureau, " Credit score myths that might be holding you back from improving your credit ." Accessed Aug. 8, 2023.
  4. Experian, " What Is a Credit Utilization Rate? " Accessed Aug. 8, 2023.
  5. Federal Reserve, " Consumer Credit - G.19 ." Accessed Aug. 8, 2023.
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