What Is the Credit Utilization Ratio?

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If you’re focused on getting your credit score up this year, start with one factor that will make a big impact. 

It’s called your credit-utilization ratio, and it makes up 30% of your score, which in turn will determine what kind of loans you’re eligible for—and the interest rates you’ll be offered. 

Your credit-utilization ratio is based on two numbers: the amount of total available credit you’re using (for example, the current balance on your credit cards) compared with the total amount of credit that’s available to you. So if you owe $3,000 on your credit cards and your credit limit is $10,000, you’ve got a ratio of 30%.  

That’s about as high as you want the ratio to go, according to experts. Generally, you should keep it under 30%. 

“The lower the ratio, the better it is for your financial health,” says Bruce McClary, a spokesperson for the National Foundation for Credit Counseling, the nation’s largest financial counseling nonprofit. 

While that’s not a hard-and-fast rule, it’s important to understand your credit utilization ratio in order to improve your credit score. Here’s a breakdown of what you have to watch.

Why Does Your Credit Utilization Ratio Matter?

Your credit utilization ratio is only associated with revolving credit — essentially, your credit cards and some lines of credit like a home equity line of credit or a personal line of credit. Other loans or lines of credit, such as your mortgage or an auto loan, aren’t included. 

Your ratio is the second most important component of your credit score after payment history, which accounts for 35%. But unlike your payment history, which is already in the past, your credit-utilization ratio is something you can actively change. The lower your keep it, the better your chances of having an excellent credit score.

“A drop in utilization has the potential to increase your credit score, and that’s a change you might see within the next one to two billing cycles, pretty fast,” says Farnoosh Torabi, NextAdvisor contributing editor and host of the “So Money” podcast. 

The 30% Rule: Truth or Myth?

The 30% rule prompts the question: exactly how low should my credit utilization ratio be? 

Everyone’s individual circumstances and their financial goals are unique, so while the 30% ceiling is a good threshold to keep in mind, it’s not the definitive answer.

The truth is the lower your credit utilization percentage, the better. 

“The people in this country with the highest credit scores have utilizations of 10% or less,” Torabi says.  

So if you can get your ratio well below 30%, you’ll see a more positive impact on your credit score. 

Remember, your credit score is made up of several factors, so it’s unlikely it will take a big hit if your credit utilization ratio rises slightly above 30% for one month. Of course, that’s contingent on the condition of your overall credit profile. For example, a ratio higher than 30% on top of missing payments or having too many hard inquiries will likely affect your credit score more negatively. 

Calculating Credit Utilization

To figure out your credit utilization ratio, divide your total balance by your total credit limit and multiply by 100.

Credit Balance ÷  Credit Limit x 100% = Credit Utilization Ratio

You can calculate your utilization rate separately for each credit card or across all cards. Credit bureaus typically look at it in both ways — for each card and overall. 

Pro Tip

If you consistently carry a balance, calculate your credit utilization ratio on a monthly basis to make sure you’re managing your credit responsibly. It’s a good practice to calculate it right before and after you make a payment to have a snapshot comparison.

Some 43% of consumers report revolving debt, and the remaining 57% pay off their credit card debt every month, says John Cabell, director of banking and payments intelligence at market-research company J.D. Power, citing data collected this year and in late 2019. 

So if you don’t carry a balance from month to month, then you’re already helping your credit score. However, if you do carry your balance, it’s good practice to calculate your ratio on a monthly basis to make sure you’re managing your credit responsibly.

How To Improve Your Credit Utilization Ratio

There are strategies you can use to keep your credit utilization low. Overall, using less of your available credit is generally better for your credit score. But you don’t want to constantly stay at 0% because that signals to lenders you aren’t making any purchases on your credit cards. You want to use the cards — even if it’s just to buy a coffee every now and then — to keep building credit. Just make sure to pay your balances every month to avoid paying interest on them.

Track Your Spending 

The simplest way to keep your credit utilization ratio under control is to watch how much you charge to each card. Make a habit of tracking your spending across your credit cards. Balance alerts can be a useful tool to stay on top of your credit. 

If you’re getting close to the 30% mark on a card, try to make a payment on it or switch to using a different card that doesn’t already have a high balance. Additionally, try to pay your credit card balance early if possible. A lower balance will save you on interest and will boost your credit score.

Ask For a Higher Credit Limit

A higher overall credit limit can lower your credit utilization ratio, so another solution may be requesting a credit line increase on your card or cards. 

For example, if you have a balance of $3,000 on a card with a $5,000 limit, increasing the limit from $5,000 to $7,000 would reduce your credit utilization ratio from 60% to roughly 43%. A drop of almost 20 percentage points can have a big impact on your credit score, which makes you look better to lenders.

If you already have a credit card with a good record, you may be able to request a higher credit limit temporarily because of the COVID-19 pandemic. Talk to your credit card issuer to better understand your options. There are a few drawbacks to requesting a higher credit limit; it could ding your score in the short term, and you’ll need to resist the temptation of spending. 

“If you actually plan to use this extra credit and to carry a balance month over month, this hack is not for you,” Torabi says

Don’t Close Unused Cards

It may be tempting to close any credit card account you’re not using, but it’s best to leave cards open after paying them off. By keeping your cards open, even if you don’t use them, you’re maintaining an overall higher credit limit. 

“When you close that credit card, that’s one less account that’s factoring into your overall utilization ratio,” McClary says. “It’s taken out of the equation, and your credit score could drop as a result.”