If you want to protect your credit score, paying your credit obligations on time is key. Yet on-time payments alone might not be enough to earn and keep a good credit score.
In addition to payment history, credit scoring models like FICO and VantageScore look closely at many other details on your credit report—especially your credit utilization ratio, essentially how much of your available credit you use across your different credit cards.
Why do credit scoring companies care? Borrowers who have a habit of charging up to their full credit limit often end up having trouble paying their bills. As a result, in VantageScore’s model, for instance, payment history makes up around 40%, but credit utilization is not far behind at 20%.
Because your credit utilization ratio can have such a meaningful impact on your credit score, it’s critical to understand how this scoring factor works.
What is a credit utilization ratio?
Credit utilization ratio, which is also sometimes called revolving utilization ratio, is usually quoted as a percentage. This percentage compares the amount you owe—i.e. your credit balance—to the amount of credit available to you—i.e. your credit limit.
For example, if you have a single credit card with a $10,000 limit and your credit report shows a $1,000 balance, your credit utilization ratio is 10% on the account.
If you have more than one credit card, credit score companies like FICO and VantageScore will look at both your credit utilization ratio for each individual card you hold, as well as your overall utilization ratio, across all your cards. (They don’t, however, look at noncredit card credit lines like a home equity line of credit.)
The result of all this is that your overall credit utilization ratio matters, but running up a balance on a favorite card could also get you into trouble. “Having a high balance on just one card can have a negative impact on credit scores,” says Rod Griffin, senior director of consumer education and advocacy with Experian.
How to calculate your credit utilization rate
To calculate your utilization rate on a credit card, start by checking your credit report. The credit card balance that appears on your credit report is typically the same balance that appears on your most recent billing statement.
(Tip: Federal law entitles you a free copy of your credit report from each credit bureau—Equifax, TransUnion, and Experian—every 12 months via AnnualCreditReport.com.)
Once you have found your credit card balance, divide it by your credit card limit. Multiply that number by 100 to turn the number into a percentage. The final result is your credit utilization rate on an individual account.
Credit Utilization Rate = Credit Card Balance ÷ Credit Limit X 100
Using the formula above, imagine your credit report shows you have a credit card with a $5,000 credit limit and a $2,500 balance. Your utilization rate in this scenario would be 50%: ($2,500 ÷ $5,000 = 0.50 X 100 = 50%)
If you want to calculate your overall (aka aggregate) credit utilization rate, add up all of your credit card balances and then add all of your credit card limits. You can then plug those two numbers into the formula above to calculate your aggregate credit utilization rate.
One thing to keep in mind: Be sure to use the credit card balance listed on your credit report, not the real-time balance you see when you log into your credit card account online. This is the number that credit score agencies use when calculating credit utilization rates.
Your credit card issuer will typically update your current account details (e.g., balance, credit limit, payment status, etc.) with the credit bureaus once a month after your billing cycle closes. If you wanted to maintain a 0% credit utilization ratio, you would need to pay off your balance before the statement closing date on your account (prior to your due date). In general, however, maintaining at least a small ratio is optimal for your credit score—more on that below.
How does your credit card utilization ratio impact your credit score?
History shows that people with heavy credit card utilization are more likely to fall behind on their bills. (Generally defined as being 90 days late on a payment.)
For that reason, credit score companies make your credit utilization ratio a big part of your score. VantageScore says your credit utilization ratio makes up 20% of your score. FICO isn’t as precise, but says debt and credit utilization account for 30% of your FICO Score.
Neither FICO or VantageScore are willing to share exact specifics about how credit utilization impacts your score for proprietary reasons. Still the credit companies have given some hints.
According to simulations published by FICO, a consumer with a 26% utilization rate, who lowered it all the way down to 1%, might expect to boost their FICO Score by up to 20 points. Meanwhile, a consumer with a utilization rate of 51% who lowered the rate to 26% saw a boost of 36 to 56 points.
Still, the biggest impact was for consumers with high FICO Scores that maxed out their credit cards. The simulations showed that a consumer who saw their utilization rate jump from 12% all the way to 100% might see their score drop by nearly 130 points.
What is a good credit utilization ratio?
Credit experts say that, in general, the lower your credit utilization ratio the better—with one key exception.
The average utilization rate across all American consumers in 2022 was 28%, up about 3 percentage points from the previous year, according to Experian. That level—which translates to an average credit card balance of around $5,900—may seem reasonable. There is a popular industry guideline that suggests you should keep your credit score below 30%.
But credit experts say this popular guideline is flawed. The 30% threshold exists because credit score companies have found, above that level, the likelihood of delinquencies are more common. If your goal is to protect or improve your credit score—or if you are someone who wants to earn an excellent credit score, you’ll want to aim for a credit utilization rate far below 30%—in the low single digits. “Thirty percent utilization is not a goal or target,” says Griffin. “Thirty percent is a number you should strive to stay as far below as possible.”
There is one caveat to minimizing how much credit you use. It’s not ideal to show zero utilization on your credit cards, and may even make you miss out on a few extra credit score points. “No utilization could look like you don’t use your credit cards, rather than you use them and manage them well,” says DeNicola.
Also remember it’s important to maintain low credit utilization on individual accounts, not just a low overall utilization rate. Maxing out even a single credit card might hurt your credit score.
Ways to lower your credit utilization rate
Here are four ways to lower your credit utilization ratio.
1. Pay down credit card debt
The best way to manage your credit cards is to always pay off your entire statement balance every month. This smart habit can help you avoid expensive interest charges and credit card debt while protecting your credit score at the same time.
If you can’t afford to pay off your full credit card balance at once, consider creating a debt elimination plan to chip away at your debt little by little. Depending on your situation, consolidating your debt with a low-interest personal loan or a balance transfer credit card might also be helpful. Note: You typically need good credit for this strategy to be effective.
2. Make multiple payments (or pay early)
Credit scores base revolving utilization rate on the balance that appears on your credit report. If you wait until the due date to pay your bill, your balance might appear higher when your card issuer updates your account details after your statement closing date. (There are at least 21 days between your statement closing date and your due date, sometimes longer.)
The upshot: Waiting until your due date to pay your balance could result in a higher utilization rate on your credit report, possibly hurting your credit score until the next billing cycle.
One potential solution is to pay the majority of your bill early (before the statement closing date on your account) and pay the remainder of your statement balance on your due date. You could also make multiple payments throughout the month.
“Making early payments can decrease your credit card account’s balance before your card issuer reports to the credit bureaus,” says DeNicola.
3. Ask for a credit limit increase
Another possible way to lower your credit utilization rate is to ask your credit card company for a credit limit increase. If you’re using your credit cards to transact, that is, to pay for purchases that you pay off when the bill is due rather than borrow money, this solution may be for you, especially if your monthly spending eats up a lot of your available credit.
Keep in mind that your card issuer may check your credit score and report when you request a higher credit limit. This credit check could result in a hard credit inquiry with the potential to impact your credit score in a slightly negative way. According to FICO, most people lose less than five points from one additional hard credit inquiry. Hard inquiries can stay on your credit report for up to 24 months, but they only factor into your FICO Score for 12 months.
4. Keep credit cards open
If you have a credit card you no longer use, you might be tempted to close the account. Yet canceling unused credit cards could be a mistake from a credit score perspective. “Even if you don’t intend to use them much, closing accounts with zero balances can hurt your overall credit utilization,” says Griffin.
However, keeping an old credit card account open might not be enough. It’s also important to use the card from time to time to make sure it shows periodic activity on your credit report.
“Accounts with no activity reported will be excluded from scores after a period of time,” says Griffin. “If you don’t use the card, it could still be on your credit report but not be helping your credit scores.”
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