Credit Utilization Ratio: What It Is and How to Calculate It

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. 

Your credit utilization rate may affect over 20% of your credit score. And if you have a high utilization rate, you might be able to quickly increase your scores by lowering it. 

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:

  1. Add your accounts’ balances and credit limits
  2. Divide the total balance by the total credit limit
  3. 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. 

Account Balance from your credit report Credit limit from your credit report Credit utilization ratio
Credit card A $4,500 $9,000 50%
Credit card B  $100 $5,000 2%
Personal line of credit $2,500  $10,000 25%
Overall utilization $7,100 $24,000 30%

What is a good credit utilization ratio?

You’ll often read advice to keep your overall utilization rate below 30%, but there isn’t a clear point when a utilization rate goes from bad to good. Instead, remember these four tips:

  • A lower utilization rate is better: An overall utilization rate of 30% might be better than 60%, but 15% is better than 30%. People with excellent credit scores often have overall utilization rates under 10%.
  • But a little utilization is better than no utilization: Although lower is usually best, a low utilization rate is actually better than 0% utilization. The reason is that credit scoring models need information to make predictions, and 0% utilization looks like you’re not using the account. 
  • Most credit scores only look at your most recent numbers: Many credit scores only consider your current utilization ratio, which is why lowering your utilization might quickly increase your credit scores. 
  • However, maintaining low utilization rates can help newer credit scores: The latest FICO and VantageScore credit scores consider trends in your credit history, including your utilization rate from one month to the next. 

Deep dive—credit report timing and your credit utilization ratio

By now, you probably know more about credit utilization ratios than most people. Here’s the final point that trips people up. The balances and credit limits come from your credit reports, but how do the numbers wind up on your credit reports? 

  • Creditors often report account information to the credit bureaus monthly: The credit bureaus (Equifax, Experian, and TransUnion) create your credit reports, and the monthly reporting is why your current balances aren’t necessarily the same as the balances on your credit reports. 
  • Credit card issuers tend to report around the end of each billing cycle: The card issuers also send your statement at this time, and your minimum payment is due around three weeks later. 
  • Paying your bill in full doesn’t result in a low credit utilization ratio: Paying your credit card bill in full each month can help you avoid paying interest, but you might still have a high utilization rate.

The timing is important because you can also use this knowledge to lower your utilization rate and potentially improve your credit scores. 

4 strategies to lower your credit utilization

You can lower your credit utilization rate by decreasing your revolving accounts’ reported balances or increasing their reported credit limits. Here are four ways to go about it:

1. Make early credit card payments 

You may be able to strategically pay down credit card balances before the end of each statement period. By making the payments a few weeks early, you can get the benefits of using a credit card—such as purchase protection and rewards—and lower the balance that gets reported to the credit bureaus and winds up on your credit report. 

2. Don’t close old credit cards

Closing a credit card account can be a good idea if the card has an annual fee or you tend to compulsively use credit cards and then carry a balance. If that’s not the case, keeping credit cards open can increase your total available credit. Even if you don’t use the card, this can help you maintain a lower overall credit utilization rate. 

3. Requesting credit limit increases

You can ask your credit card issuers to increase your credit limit, which can lower your credit utilization ratio if your balances stay the same. However, the request sometimes results in a hard inquiry, which can lower your credit scores even if you don’t get a higher credit limit. 

To request an increase, call the card issuer or see if there's an online option available. You might want to wait until there’s been a significant positive change in your credit score, or until you’ve had and responsibly managed the card for at least six months. Also, update your income with the card issuer whenever your income increases because card issuers sometimes give you a credit limit increase without you having to ask.  

4. Use multiple credit cards

Opening and using several credit cards can help you maintain a lower overall utilization rate. You can also spread out your purchases to keep the utilization rate on each account low. Perhaps you have one card for groceries and dining, another for subscriptions, and a third for everything else. If you have rewards cards, try to align your spending with their bonus rewards categories.

If you’re looking for a simple way to increase your available credit, the Ava card doesn’t require a good credit score or hard credit pull. The new credit card account will also have a high credit limit, doesn’t have any fees or interest, and you can use it to pay subscriptions and keep the per-card utilization rate low.

Keep your entire credit profile in mind

Paying down credit card debt and using the strategies above can help you maintain a low credit utilization ratio. However, even if you have a good utilization ratio, don’t forget about the other credit scoring factors. 

Your payment history can be the most important factor, and making at least your minimum payments on time is crucial to getting a good credit score. Having a mix of revolving and installment accounts, the age of your credit accounts, and whether you’ve recently applied for credit can also impact your scores.

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