What Is A Credit Utilization Ratio And Why Does It Matter?

Credit utilization is one of the major factors that credit scoring agencies use to calculate your credit score. The amount of available credit (or the percentage of your revolving credit limit) you use sends a signal to lenders about how likely you are to use and pay back funds.

That’s why it’s important to know what your credit utilization ratio is and how it works before applying for a loan or credit card.

What Is A Credit Utilization Ratio? 

Your credit utilization ratio is the percentage of the overall credit limit you use on your revolving credit accounts, such as credit cards and lines of credit. When it comes to your credit score, it’s best for your credit utilization ratio to be as low as possible; ideally below 30% to qualify for the best rates and terms.

How Does Your Credit Utilization Affect Your Credit Score?

Your credit utilization ratio is one of the key factors that makes up your credit score. Both FICO® and VantageScore^® account for credit utilization as part of your credit score. This ratio holds 20% weight with VantageScore® and 30% with your FICO® Score. 

A lower credit utilization ratio can boost your credit score, making it more likely that lenders will qualify you for lower interest rates. Lower rates reduce the amount of interest you pay on a loan or credit card over time, saving you money.

How To Calculate Your Credit Utilization Ratio

To calculate your credit utilization ratio, add up all the balances on your credit cards. Then add up all their credit limits. Next, divide your total balance by your total credit limit. Multiply that number by 100 to see your credit utilization ratio as a percentage.

Here’s what that formula looks like:

Credit utilization ratio = (Total credit balance / Total credit limit) x 100 

For example, say you have three credit cards each with different credit limits and balances. You would add all your current balances and credit limits for all your cards and divide the total balance by the total credit limit to get your overall utilization ratio. 

You can also calculate the credit utilization for each card separately and average them all together. Both methods will arrive at the same percentage.

How To Lower Your Credit Utilization Ratio

Lowering your credit utilization ratio is one of the best ways to help improve your credit score. You can do so by increasing your credit limit (so long as you don’t increase your spending across credit cards) and paying down  balances, amongst other methods.

1. Pay Down Your Balances

By paying down your credit card debt, you  decrease your credit utilization ratio. For example, if your current balance is $2,500 on a credit card that has a $5,000 credit limit, your credit utilization is 50%. If you were to pay off your card’s balance by $1,000 down to $1,500, the ratio decreases to 30%.

2. Decrease Spending

As you pay down your credit card balances, be mindful of how much you spend on your cards. For example, maybe you can cut back on spending in some areas so you’re not using your credit card as often. Monitoring your spending throughout the month to ensure your credit utilization isn’t too high can help your score.

3. Increase Your Credit Limit

Increasing your credit limit, even if you carry the same balance, can lower your credit utilization. For example, if you have a $2,000 balance on a credit card that has a $4,500 limit, your credit utilization ratio is 44.4%. If your credit limit increased to $6,000, your ratio would decrease to 33.3%. 

To increase your credit limit, contact your credit card issuer and make the request. Be aware that this may trigger a hard credit inquiry, which could affect your credit score temporarily. You should also keep any existing credit cards open even if you don’t use them to keep your overall credit limit as high as possible.

How Can You Lower Your Credit Utilization Ratio?

Lowering your credit utilization ratio is one of the best ways to help improve your credit score. You can do so by taking certain steps, such as increasing your credit limit and paying down your balance.

Pay Down Your Balances

By paying down the balance on your revolving credit accounts, you can decrease your credit utilization ratio. For example, if your current balance is $2,500 on a credit card that has a $5,000 credit limit, your credit utilization is 50% for that card. If you were to pay down the balance by $1,000 to $1,500, it goes down to 30%.

Decrease Spending

As you pay down your balances, you may want to consider being mindful of how much you spend on your cards. For example, you can look at what your current budget and cut back on spending in some areas so you’re not using your credit card as often. Monitoring your spending throughout the month to ensure your credit utilization isn’t too high can help you keep things in check.

Increase Your Credit Limit

Increasing your credit limit, even if you carry the same balance, can lower your credit utilization. For example, if you have a $2,000 balance on a credit card that has a $4,500 limit, your credit utilization ratio is 44%, compared to 33% if you were to get your credit limit increased to $6,000.

To increase your credit limit, you can try to contact your credit card issuer to request one — doing so could trigger a hard credit inquiry which could affect your credit score. Also, keep any existing credit cards open even if you don’t use them to keep your overall credit limit as high as possible.

Credit Utilization Rate FAQs

The following are some commonly asked questions about credit utilization ratios.

What’s a good credit utilization ratio?

While there’s no set amount of credit you should and shouldn’t use, in general, aim to keep your credit utilization ratio lower than 30% of your total credit limit.

What’s more important, my credit utilization per card or overall?

Both your credit utilization per card and overall are equally as important when it comes to your credit score. That’s because the three credit bureaus take all of it into account to impact your credit score

Can closing a credit card affect my credit utilization ratio?

Yes, closing a credit card can affect your credit utilization ratio, as it lowers your overall credit limit and average length of credit. Even if you have the same balance across all your cards, the lower credit limit can increase your credit utilization.

Should I open a new credit card to improve my credit utilization rate?

Opening a new card can improve your credit utilization rate because of the initial increased credit limit, but it may not last long. If you spend more as a result and increase your balance, you’ll risk increasing your credit utilization and hurting your score.

How often is my credit card utilization ratio updated?

Your credit utilization is usually reported to the major credit bureaus every 30 days.

The Bottom Line

Credit utilization is one of the most important factors in calculating your credit score, so it pays to keep it as low as possible. When you apply for a new credit card or loan, a low ratio can increase your chances of getting approved at competitive rates and terms to help you save.

You can keep track of your credit score by downloading the Rocket Money℠ app. Not only is it free, using it often can help you keep tabs on your finances in one central location.