Any damage from having a high credit card balance goes away when the credit bureaus get new information about your new, lower balances. This is true for most credit scores.
A high credit card utilization typically stops hurting your credit score once a new, lower balance is reported to the credit bureaus. The main way to reduce your credit card utilization is to pay down your balances. Once you do that, your score might recover within a couple months, all other things being equal.
Your credit utilization ratio – the amount of credit you’re using compared to your total available credit – is an important factor in determining your credit score. But just how much does it impact your score? Let’s take a closer look.
What is Credit Utilization?
Credit utilization refers to how much of your available revolving credit you are currently using It is calculated by dividing your total balances by your total credit limits on accounts like credit cards and lines of credit
For example, if you have a total credit limit of $10,000 across all your credit cards and your total balance is $3,000, your credit utilization rate would be 30% ($3,000/$10,000).
This ratio is typically expressed as a percentage. Your credit score will go up if you have a low utilization rate.
How Credit Utilization is Calculated
To calculate your overall credit utilization
- Add up the credit limits on all your credit cards
- Add up the balances on all your cards
- Divide the total balances by the total credit limits
- Multiply by 100 to get a percentage
You can also calculate utilization on a per-card basis. For just one card, divide the balance by the card’s credit limit.
It’s best to calculate utilization using the balances and limits reported on your credit report, as that’s what scoring models use.
The Weight of Credit Utilization in Credit Scores
Credit utilization accounts for 30% of your FICO credit score – the second biggest factor after payment history at 35%. It’s also known as a “highly influential” factor in VantageScore credit scores.
So utilization makes up a significant portion of your score. The higher your utilization rate, the more it can negatively impact your credit score.
What is Considered a Good Utilization Rate?
The commonly recommended threshold is to keep utilization below 30%. However, lower is generally better when it comes to this credit scoring factor.
People with excellent credit scores of 800 or higher tend to have very low utilization, averaging around 7% according to Experian data.
While 0% utilization isn’t ideal, it’s still better than high utilization. The sweet spot is having a small, non-zero balance reported to show responsible credit use.
How Much Does Utilization Impact Credit Scores?
The impact utilization has on your score depends on your current score and other factors in your credit report. However, here are some general guidelines:
- 30% utilization can start to negatively impact scores more significantly
- 10% or less is ideal for an excellent score
- Each individual card’s utilization matters too
- Maxing out cards at 100% utilization hurts scores
In general, decreasing utilization from high levels like 50% to lower levels like 10% can result in a credit score improvement.
For some, it may not take much change to see a difference. Even reducing utilization from say 45% to 42% could yield a small score increase. The higher your utilization, the more room for improvement.
Why High Utilization Hurts Your Credit Score
From a lender’s perspective, high utilization may signal increased credit risk for a few reasons:
- It suggests you’re relying heavily on credit and may be overextended
- Your balances relative to income are likely high (since income isn’t reported)
- There’s a higher risk of missed payments and potential default
Credit scoring models look at utilization as an indicator of your ability to manage credit responsibility. The lower your utilization, the less credit risk you pose.
How to Improve Your Credit Utilization
Here are some tips to decrease utilization and improve your credit score:
- Pay down balances – Paying down or paying off credit card balances can quickly lower utilization
- Make multiple payments – Making biweekly or mid-month payments helps lower reported balances
- Ask for higher limits – Increasing your overall credit limit lowers utilization if balances stay the same
- Open a new account – A new card increases total available credit and can lower utilization
- Consolidate debt – Balance transfer or debt consolidation loans pay off credit cards
- Keep accounts open – Closing accounts decreases total available credit, so keep them open
The most effective ways to reduce your utilization ratio are bringing down balances and giving yourself more total credit. Just be careful not to overspend with new credit.
The Takeaway
A big part of your credit score comes from how much credit you use, which makes up 30% of your FICO score. To get the best score, you should try to keep utilization as low as possible.
Aim for a utilization rate of 10% or less for the best credit. Reduce current balances, request credit limit increases, open new accounts if needed, and make multiple payments during the month.
Lowering your credit utilization from high levels can lead to a nice boost in your credit score. So keep a close eye on this important scoring metric.
How Credit Utilization Rate Affects Credit Scores
Credit card utilization is the portion of your credit card limit that is in use. Credit utilization is an important factor in calculating “amounts owed,” which makes up about 30% of your FICO® ScoreÎ. FICO® Scores are used by 90% of top lenders, so its an important consideration.
You can calculate your credit card utilization by dividing your cards balance by its credit limit. Similarly, overall credit utilization is the sum of your total credit card debt across all cards divided by the sum of your credit card limits and multiplied by 100.
Heres an example of how this could work.
Lets say you have a retail credit card with a credit limit of $300, and you charge $150 worth of merchandise. You now have a credit card utilization rate of 50%âwell above the recommended 30% ceilingâfor that particular credit card.
Now lets say you have a second credit card that you mainly use to buy coffee. It has a credit limit of $5,000 and the typical monthly balance is also about $150. The utilization on that card is just 3% ($150 divided by $5,000, multiplied by 100).
If you only have these two cards, overall utilization would be slightly less than 6% ($300 divided by $5,300, multiplied by 100). Thats an excellent overall credit utilization rate.
How Long Does High Credit Card Utilization Impact Your Credit Score?
For most credit scoring models, a high credit card utilization can impact your credit score as long as your balances remain high. If you pay down your balance and your card issuer reports the lower credit card utilization to the credit bureaus, you could see a positive effect on your scores in as little as 30 days.
Credit scores are sensitive to your credit utilization ratioâthe amount of credit youre using relative to your total credit limits. The lower your utilization, the better for your credit score.
However, some newer scores, namely VantageScore® 4.0 4.0 and FICO® 10 T Score, use something called trended data. Those credit scores include utilization data from up to 24 months ago. You can think of traditional credit scores as a snapshot and scores using trended data as a video. As the name implies, they look at the trend over time. Are your balances overall growing or shrinking? They arent yet used for mortgages, but they will be in the future. The use of trended data means that paying off credit card debt all at once, whether through a loan or a windfall, is unlikely to keep a history of high balances from affecting your credit score.
Most credit experts suggest keeping credit utilization under 30%. That means if you have a credit card with a $3,000 limit, you should keep the balance under $900 to avoid doing more serious damage to your credit score. If your credit utilization changes significantly, the impact to traditional scores can be large.
What is Credit Utilization & How Does It Affect Credit Score? | Capital One
FAQ
How much does utilization impact credit score?
Keep in mind that there are many different credit-scoring models. And how credit utilization and unpaid debt affect your scores can vary. FICO®, for example, says that debt accounts for 30% of its score. VantageScore® says that credit utilization makes up 20% of its scores.
How can I raise my credit score 100 points in 30 days?
Raising your credit score by 100 points in 30 days is ambitious but achievable. The key is to focus on strategies that have a significant and immediate impact on your credit report.
Will 50% credit utilization hurt me?
On a serious note, it’s not bad but it’s not good either. It won’t help your credit score to improve and once you start going above 50% consistently, it may start impacting the score as well.
Does 0% utilization hurt credit score?
Yep, having 0% utilization can sometimes cause 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.