Your credit utilization ratio is a measure of how much credit youâve used versus how much credit you haveâtypically expressed as a percentage. In general, having a lower credit utilization ratio is better for your credit scores.
But how do you calculate your credit utilization? Whatâs considered a good credit utilization ratio? And why does your credit utilization matter? Read on to learn more.
How much credit you use is an important factor that can have a big effect on your credit scores. But what is credit utilization, and why is it so important? This guide will tell you everything you need to know about credit utilization, including how it’s calculated, what the best rates are, and what you can do to make this important metric work better.
What is Credit Utilization?
Credit utilization is the amount of your available revolving credit that you are currently using as a percentage. It is found by dividing your total credit card balances by your total credit limits on those accounts.
For example if you have 3 credit cards with the following limits and balances
- Card 1: $5,000 limit, $2,000 balance
- Card 2: $10,000 limit, $5,000 balance
- Card 3: $2,000 limit, $0 balance
Your total credit limit across the 3 cards is $5,000 + $10,000 + $2,000 = $17,000
Your total balances are $2,000 + $5,000 + $0 = $7,000
Therefore, your overall credit utilization rate is:
$7,000 (balances) / $17,000 (total limit) = 41%
Revolving credit accounts like credit cards are typically used in the credit utilization calculation. Other types of credit like installment loans or mortgages are not factored in.
Why Credit Utilization Matters
Your credit utilization ratio is an important factor in calculating your credit score. Credit scoring models like FICO and VantageScore analyze your utilization to assess how well you are managing your available credit.
Your credit score can go up if you use less of your available credit. This shows lenders that you are responsible with your credit. It shows that you can borrow a reasonable amount of money and pay it back on time every month.
High utilization, on the other hand, can hurt your credit score because it means you may be overextended and more likely to miss payments.
Here are some key facts on how credit utilization is weighted in major scoring models:
- FICO: Utilization accounts for approximately 30% of your FICO score
- VantageScore: Utilization is around 20% to 30% of your VantageScore
So optimizing your utilization by keeping it low can provide a nice boost to your credit score. We’ll cover some tips on how to do that shortly.
What is a Good Credit Utilization Rate?
The ideal credit utilization rate is below 30%. This threshold is commonly recommended by credit experts as a benchmark to aim for.
The chart below shows average credit utilization by FICO score range, illustrating that lower rates correspond with higher scores:
| FICO Score Range | Average Utilization |
|---|---|
| 300-579 (Poor) | 82.1% |
| 580-669 (Fair) | 56.1% |
| 670-739 (Good) | 35.2% |
| 740-799 (Very Good) | 14.7% |
| 800-850 (Exceptional) | 6.5% |
As you can see, people with exceptional FICO scores over 800 tend to keep their utilization below 10%.
While 0% utilization may seem ideal, it can actually have a slight negative impact on your score since scoring models like to see at least some account usage. So a rate between 1% and 10% is considered optimal for credit scoring purposes.
How is Credit Utilization Calculated?
Calculating your overall credit utilization rate is straightforward:
Total Balances / Total Credit Limits x 100 = Utilization %
For example:
- Total Balances: $5,000
- Total Limits: $20,000
- $5,000 / $20,000 x 100 = 25% utilization
You can calculate utilization for each individual credit card as well. This per-card utilization can also impact your scores, along with your overall utilization rate.
Scoring models typically look at your utilization based on your latest reported card balances. So you may be able to improve your utilization quickly by paying down balances before they are reported.
Tips to Optimize Your Credit Utilization
Here are some tips to lower your credit utilization rate and keep it in the optimal range:
- Pay more than the minimum each month to chip away at balances faster
- Pay down balances before the statement closing date since that is typically when they are reported
- Request credit limit increases responsibly to lower your utilization
- Avoid closing old credit cards as this can decrease your total limits
- Open a new card only if you will use it responsibly and avoid high utilization
- Track utilization regularly and focus on keeping it below 30%, ideally below 10%
Monitoring services like CreditWise and myEquifax can help you keep an eye on your utilization across all your credit cards. This allows you to quickly catch any spikes and take corrective action.
The Takeaway
Your credit utilization ratio has a major influence on your credit scores. Maintaining a rate below 30% can benefit your credit profile, with the ideal range being 1% to 10%. By understanding what goes into the utilization calculation and tips to optimize it, you can take the right steps to level up your credit. Monitoring your utilization and keeping it low over time is key to building and protecting strong credit.
Pay more than the minimum
The Consumer Financial Protection Bureau (CFPB) recommends paying off your entire balance whenever possible. But if you canât, try to pay more than the minimum monthly credit card payment. That way, you can keep your balances and credit utilization as low as possible.
How to lower your credit utilization ratio
Here are a few strategies you may be able to use to lower your credit utilization ratio:
Credit utilization doesn’t matter
FAQ
Why is credit utilization important?
Lenders use your credit utilization ratio to help determine how well you’re managing your current debt. To improve your credit utilization ratio, it’s generally best to decrease your outstanding debt. Depending on your situation, it may also be appropriate to consider increasing your credit limits.
What is the 2/3/4 rule for credit cards?
The 2/3/4 rule is a credit card application restriction specifically used by Bank of America. It limits the number of new credit cards you can be approved for within certain timeframes.
Does credit utilization matter if you pay in full every month?
Does 0% utilization hurt credit score?
As you said, having 200 percent utilization can sometimes lead to a small score drop because credit scoring models like to see some activity. It’s weird, but they prefer you to use credit rather than have a $0 balance reported.