There are a handful of different factors that go into calculating your credit score, used by lenders to determine your creditworthiness. One of the most important elements is your credit utilization ratio, sometimes called the credit utilization rate, credit usage ratio, or simply credit utilization.
This ratio is used to determine how well you manage your credit card debt. It’s the second most influential factor in your FICO credit score behind your payment history. Here’s what you need to know.
What Is the Credit Utilization Ratio?
Simply put, your credit utilization rate is the percentage of your available credit that you’re using at a given time on your revolving credit accounts.
In addition to credit cards, this also includes other revolving forms of debt like lines of credit. But because credit cards are the most popular form of revolving credit, that’s where you’ll want to focus.
A high credit card utilization rate means that you’re using a lot of your available credit, and it can be a sign that you’re struggling to manage your debt. As a result, a high utilization rate can correspond with a lower credit score. On the flip side, the lower your credit usage ratio, the better it is for your credit score.
How Is Your Credit Utilization Ratio Calculated?
Your utilization rate is calculated for each individual credit card you own, as well as across all of your cards.
The way to calculate it is simple: simply divide each credit card balance by its credit limit, then add them all together and do the calculation again based on your total credit limit across all your cards.
An Example of Credit Utilization Ratio
Let’s say you have three credit cards. Here’s how you’d run the calculations:
- Card A: $5,000 balance with a $10,000 credit limit gives you a 50% utilization rate.
- Card B: $2,000 balance with a $3,000 credit limit gives you a 67% utilization rate.
- Card C: $800 balance with a $1,000 credit limit gives you an 80% utilization rate.
Altogether, your utilization rate based on your total balances and total available credit, your utilization rate would be roughly 56%.
What Does Your Credit Utilization Impact?
According to the FICO scoring model, your credit utilization is the most important factor in how much debt you owe, which impacts 30% of your FICO credit score.
Depending on the situation, it could also impact your payment history — if your balances are so high that you can’t keep up with payments, one payment that’s 30 days late could wreak havoc on your credit score.
Additionally, having a high balance on your credit cards means you may be paying a lot of interest on your credit card debt, which could have a ripple effect on your financial well-being.
Tips to Improve Your Credit Utilization Percentage
If you’re hoping to pay down your credit card debt and improve your credit score, here are some tips to help you achieve your goal.
Stop Using the Card
If you’re using your credit card while trying to pay it off, it can feel like you’re taking two steps forward and one step back. In order to reduce your credit utilization rate fast, it’s best to switch to other payment methods like a debit card or cash, so you’re not fighting against yourself.
Make Paying Off Credit Card Debt a Priority
It can be easy to get complacent with credit cards — their minimum payments are essentially designed to keep you in debt longer. As a result, it’s important to focus on paying down your high-interest credit card debt to save money and maintain a good credit score.
That can include applying windfalls like job bonuses and your annual tax return and taking advantage of other strategies to eliminate credit card debt.
Make a Payment Before the Statement Closes
You technically don’t have to make a monthly payment until your due date. But credit card companies typically report your balance to the credit bureaus based on the statement balance at the end of your billing cycle.
If you make a payment before your statement closes, it reduces the amount the card issuer reports to the three credit bureaus, Experian, Equifax, and TransUnion.
This can be especially helpful for people who pay off their balance in full each billing cycle, but they tend to run a high balance, and it’s hurting their credit.
Apply for a New Credit Card
Adding a new credit card to your wallet can reduce your credit usage ratio because it’s adding more available credit to your formula. Just make sure you don’t rack up a balance on the new card. Otherwise, it may not have the effect you want.
FAQs About Credit Utilization Ratio
As you work on paying down your credit card debt to achieve a lower utilization rate, here are some other questions you may have along the way.
The lower your utilization rate, the better it is for your credit score. And the better your credit score is, the better interest rates you may get offered for credit. That said, constantly maintaining a 0% utilization rate could make it appear like you’re not using credit at all could potentially have a negative impact on your credit score.
Many experts have opined that the ideal credit usage ratio is under 30%. But there’s really no hard-and-fast rule. While 30% is better than 60%, for instance, the goal should be to maintain as low credit utilization rate as possible.
In general, people with exceptional credit tend to have a utilization rate of less than 10%.
Absolutely. It’s also a quick way to do it if you need a better credit score quickly. That’s because credit card companies report your balance information to the credit bureaus once a month. So if you make a large payment today and your card issuer reports a few days from now, you’ll see the impact on your credit score as soon as the new balance shows up on your credit reports.
That said, it’s impossible to say exactly how much your score will increase. Also, cutting your utilization rate from 10% to 5% may not have as much of a positive impact on your score as cutting it from 50% to 25%.
There are only two variables that go into your credit utilization rate: your balance and your available credit. So if you can reduce your balance by paying it down or increase your available credit by getting a new credit card, you can accomplish your goal of achieving a low credit utilization ratio.
As previously mentioned, there are a few different ways you can improve your utilization rate, either by targeting your credit card balance or your total available credit. Options include:
Stop using your card while paying off the balance.
Focus on paying down your credit card debt as quickly as possible.
Make a payment before the end of the billing cycle, so the card issuer reports a lower balance.
Apply for a new credit card.
As you take steps to work on your credit utilization rate, you may start to see improvements within just a month or two. It’s also a good idea to monitor your credit regularly, so you can see how your efforts pay off in the long run.
