Credit Utilization Ratio: What It Is and How to Calculate It
Improving your credit can take time. You may need to wait for the effect of late payments and other negative marks to diminish. And making on-time payments can help your credit—but you won’t necessarily see a big jump right away. However, your credit utilization ratio is an exception. It can have a significant effect on your credit scores, and it’s something that you might be able to change quickly.
What is credit utilization and why is it important?
Your credit utilization ratio, sometimes called revolving utilization rate or simply your utilization rate, is the percentage of your available credit that you’re using. Credit scoring companies have found that people with high utilization rates are more likely to miss a bill payment in the future. As a result, having a high utilization rate can hurt your credit scores.
How do you calculate credit utilization?
You only need to know elementary school math to calculate your utilization rates. However, some people get tripped up because they don’t know where to look for the numbers.
Remember these two points:
- Use the numbers from your credit report: Credit scores don’t have access to your accounts and can’t see your current account balances and credit card limits. They use the numbers from your credit reports—so should you.
- Only include revolving credit accounts: These may include credit cards, personal lines of credit, and home equity lines of credit. The balances on installment loans, such as auto loans and student loans, can affect your credit scores. But they aren’t part of your revolving credit utilization.
Now, for the math:
- Add your accounts’ balances and credit limits
- Divide the total balance by the total credit limit
- Multiply by 100 to get a percentage
The result will be your overall utilization rate. However, credit scoring models may consider both your overall utilization and the utilization rate of the account with the highest utilization, so knowing the per-account utilization can also be important.
Here’s what this might look like if you have two credit cards and a personal line of credit.