What Is a Credit Utilization Ratio?
Key takeaways
- A credit utilization ratio is the percentage of your available revolving credit (typically credit cards) that you’re currently using.
- Your credit utilization ratio is a key factor in determining your credit score.
- Experts generally recommend keeping your credit utilization ratio between 1% and 30%.
Your credit utilization ratio is the percentage of your available revolving credit that you’re actually using. One way to visualize this is as a dinner plate: The whole, empty plate is like your available credit. It’s there for you to use with piles of food — or in this case, purchases. The area of the plate that you actually fill with food is the portion of your available credit that you’re actually using.
Credit utilization ratio: How it works
Your credit utilization ratio is expressed as a percentage and represents how much of your available revolving credit you’re using (how much you owe) compared to what you’re allowed to use (your total credit limit). In other words, if you completely fill your dinner plate so there’s no visible plate left, you’d have a 100% utilization ratio. But if you only fill half of your plate, your utilization ratio would be 50%.
| Accounts included in credit utilization ratio | Accounts not included in credit utilization ratio |
|---|---|
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Understanding your credit utilization ratio is important, as it plays a major part in your credit score. Since your credit score is like a GPA for your financial life, keeping it in top shape is crucial to gaining access to the best financial opportunities. By keeping a lower credit utilization ratio, you show lenders that you aren’t too dependent on borrowing money. However, lowest isn’t always better with a credit utilization ratio.
How credit utilization affects your credit score
Your credit score is calculated by compiling data from several categories, including your payment and credit history, available credit and credit utilization. In fact, credit utilization is one of the biggest determining factors. It represents 20% of your VantageScore and is a key component in 30% of your FICO Score.
A high credit utilization ratio can negatively impact your score, as it suggests you’re close to maxing out your credit cards and may be overspending. However, too low of a credit utilization score isn’t always optimal, either. You’ll want to use some credit to show that you’re a responsible user and can manage your obligations.
A recent LendingTree study found that consumers with 720-plus credit scores had an average utilization ratio of 10.2%. In contrast, those with a credit score of 579 or below had an average utilization ratio of 75.7%.
How to calculate your credit utilization ratio
Your credit utilization ratio is calculated by dividing the total credit you use across all of your accounts by your credit limits.
Credit utilization ratio = Total credit used ÷ Total available credit
Find your total credit used and total available credit by checking your revolving credit account statements or by viewing your credit report.
Credit utilization ratio examples
Let’s assume you have three credit cards, each with a $10,000 credit limit. This means you have $30,000 in available credit. Your current balance on each card (in other words, how much you’ve spent on a card and still owe) is $4,000. That means you’re using $12,000 of credit total. Therefore, your credit utilization ratio is $12,000 divided by $30,000, or 40%.
See this illustrated below:
| Balance | Credit limit | |
|---|---|---|
| Card #1 | $4,000 | $10,000 |
| Card #2 | $4,000 | $10,000 |
| Card #3 | $4,000 | $10,000 |
| Total credit used = $12,000 | Total available credit = $30,000 | |
| $12,000 ÷ $30,000 = credit utilization ratio of 40% | ||
If you were to pay off $3,000 in credit card debt, you’d reduce the overall amount you currently owe to $9,000, without changing your available credit. That payment would then bring your credit utilization ratio down to 30%.
Here’s the math:
| Balance | Credit limit | |
|---|---|---|
| Card #1 | $1,000 | $10,000 |
| Card #2 | $4,000 | $10,000 |
| Card #3 | $4,000 | $10,000 |
| Total credit used = $9,000 | Total available credit = $30,000 | |
| $9,000 ÷ $30,000 = credit utilization ratio of 30% | ||
If, on the other hand, you were to close one of your credit card accounts, this would reduce your available credit to $20,000. Let’s say you also still owe $12,000 across your remaining cards. Then your credit utilization ratio would increase to 60%.
Here’s that visualized:
| Balance | Credit limit | |
|---|---|---|
| Card #1 | $6,000 | $10,000 |
| Card #2 | $6,000 | $10,000 |
| Total credit used = $12,000 | Total available credit = $20,000 | |
| $12,000 ÷ $20,000 = credit utilization ratio of 60% | ||
This is why it’s not always wise to close unused credit accounts. Keeping them open but not carrying a balance will increase your available credit and help you maintain a lower credit utilization ratio.
What is the best credit utilization ratio?
Now that you understand what a credit utilization ratio is, the question is: What ratio is best?
Having too high of a ratio is bad, as it could indicate you overspend and hurt your credit score. But a 0% score isn’t ideal, either. You’ll want to find the sweet spot somewhere in the middle. The good news is that experts have identified where that sweet spot lies: It’s called the 30% credit utilization rule.
The 30% credit utilization rule
Experts generally recommend that you keep your credit utilization ratio under 30%, but not below 1%. However, this doesn’t mean you need to use only 1% of your total available credit to have a good credit score. Anything in the low single digits is ideal, according to the credit bureau Experian.
That said, you can still have an excellent credit score with a double digit credit utilization ratio. The key is to ensure you always pay your balances in full each month. As an added bonus, not carrying balances on your cards will help you naturally lower your credit utilization score.
How to keep your credit utilization low
Your credit utilization ratio is based on two important factors: how much you owe and how much credit you have available. This means you can lower your utilization ratio (and improve your credit score) by changing either of these two factors in the right direction. Here are some strategies to help you keep your credit utilization low:
- Pay off your debts. Not carrying a balance on your credit accounts is essential to your credit health. But it can also help you avoid using too much of your credit. By paying your debts in a timely fashion, you prevent balances from carrying forward and compounding over time.
- Request a credit line increase. Increasing your available credit can help you reduce the percentage of your balance that you actually use. You may be able to increase your available credit by requesting a credit line increase from your lender. It’s usually free and easy to do online.
- Keep credit accounts open. When you close a credit account, you reduce your total available credit. This can cause you to increase the percentage of your credit that you’re using, and raise your utilization ratio. Leaving unused credit accounts open can help keep your total available credit high, and thus your credit utilization ratio low.
- Consolidate your debt. Your credit utilization ratio is based on only your total revolving credit. This means balances you owe on personal loans aren’t factored into the score. As such, another way to lower your credit utilization ratio is by using a personal loan to pay off your credit card balances.
- Apply for a new credit card. Opening a new card can increase your total available credit and help you maintain a low credit utilization ratio. However, applying for credit cards requires a hard pull on your credit, which could temporarily hurt your credit score. You should make sure to only apply for cards you’re likely to be approved for and pay off your balances each month. In addition, focus on no-annual-fee credit cards to avoid excess fees.
- Set up automatic payments for your bills. One of the best ways to ensure you always pay your credit card balances in full each month is by using automatic payments. This way you won’t accidentally forget to pay on time. Just make sure you have enough money in your linked bank account to pay your last statement balance.
- Use credit alerts. Credit alerts can be used for a variety of purposes, including when it’s time to pay your bill and when you’ve reached a certain utilization ratio. You can set your credit card account to notify you a few days before your bill’s due date so you never miss a payment. You can also use a credit monitoring service to notify you when your credit utilization ratio changes, so you know if you need to slow down your spending.