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What Is Credit Utilization & How Much Should I Use?
Key takeaways
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Your credit utilization reflects how much revolving debt you are using compared to the amount that's available
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It can be a big factor in your credit score, often second only to your history of making payments on time
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A low credit utilization rate generally is considered a sign of good creditworthiness
Your credit report contains many numbers from your financial history. Some of the more important numbers show the amount of credit you have available to you in the form of credit cards, personal credit lines, and home equity lines of credit (HELOCs), and how much of that credit you're using.
Together, they show your credit utilization rate—the amount you have to pay compared to the total amount of credit available. This rate can be a major factor in your credit score.
And because your credit score can have such a big impact on your finances, it pays to know about credit utilization. In this article, we'll go into detail about why credit utilization matters to your credit score, what the ideal utilization rate is, and how to lower your credit utilization ratio in order to improve that all-important credit score.
Why does credit utilization matter?
Your credit score is derived from a number of factors. Paying bills on time—your payment history—has the most influence. Credit utilization, however, is a close second, accounting for about 30% of your FICO® credit score, the most commonly used credit scoring model.
Your credit utilization, as well as your overall credit score, indicates to lenders:
- How responsibly you manage credit
- Whether you rely too heavily on credit
- How likely you are to make on-time payments
Credit scores help lenders decide whether to extend credit to consumers who apply for it. They also help lenders determine what interest rates, credit limits, and other terms they’ll set for loans. Many utilities and insurance companies check the credit scores of applicants before deciding on approvals and terms.
In short, a good credit score can save you thousands of dollars in interest charges and fees while opening the doors to important sources of credit.
How do I calculate credit utilization?
The math for calculating credit utilization is fairly basic. Here's how to do it for one credit card account:
- Find your credit limit and the balance owed.
- Divide the balance by the credit limit.
- Multiply by 100 to show it as a percentage.
Credit utilization = (credit used ÷ credit limit) x 100
This calculation can be done on a per account basis, across all credit cards, or across all revolving credit lines combined. (Revolving credit usage means you can use the credit over and over as you make payments, as with a HELOC.)
Here's an example of credit utilization calculation: Let's say you have a $10,000 limit and the balance you owe is $3,000.
- $3,000 ÷ $10,000 = 0.3 x 100 = 30% utilization ratio.
How much credit should you use?
Experts say that the ideal credit utilization rate is generally below 30%, but lower is better. There's a strong correlation between credit utilization and credit scores.
For example, people with "very good" or "exceptional" credit scores, generally have credit utilizations of 15% or less.
Conversely, credit utilization above 30% may lower your credit score. People with "fair" credit scores may have credit utilization of 50% or more, and those with "poor" scores have an average of 86%.
Examples of credit utilization
Here are a few examples of what might be considered healthy and potentially unhealthy credit utilization ratios:
Single credit card
The credit limit is $5,000. A balance that would correspond to a "very good" or "exceptional score" would be $750, or 15%.
Multiple cards
There’s a credit limit of $20,000 across several cards. Recommended maximum overall balance to stay within 30%: $6,000
However, having one card with a very high utilization rate could impact your credit score even if your overall utilization is below 30%. Lenders may look at both. Here's an example.
Individual vs. total utilization
- One card with $6,000 limit and $5,000 balance = 83% credit utilization
- One card with $10,000 limit and $1,000 balance = 10%
- One card with $4,000 limit and $0 balance: 0%
In this scenario, the overall credit utilization ratio is 30%, but the card with the 83% utilization could still impact the credit score.
6 ways to lower credit utilization
1. Pay down balances
It may be easier said than done, but paying down balances to reduce utilization could improve your credit score. Divert as much cash flow as you can toward debt repayment and concentrate on the cards with the highest utilization ratios.
2. Make multiple payments per month
Credit utilization is calculated based on the outstanding balance as of the close of the statement period. Making multiple payments before the statement closing date can help to bring down credit utilization.
3. Increase your credit limit
You can call your credit card company and request a limit increase. Or, if you have a good credit score, you might apply for an additional credit card. The catch here is to avoid building up a balance on the new card or the one with the increased credit limit.
4. Spread purchases across multiple cards
Rather than put a large purchase on one card, use two or three different cards to keep credit utilization below 30% on each.
5. Keep accounts open
It's tempting to close out credit cards you don't use, especially if they carry an annual fee. But every card you have adds to your overall available credit.
6. Avoid large purchases right before credit checks
Timing is everything in finance. If you're planning to apply for a car loan or mortgage, a lender will be checking your credit score. Manage your utilization rate, and avoid possible impacts on your credit score, by not charging big purchases before you’ll be applying for a loan. An untimely purchase could keep you from getting a lower interest rate and result in higher monthly payments.
How does credit utilization affect my credit score over time?
As we mentioned earlier, credit utilization is typically a big factor in determining your credit score. Lenders use credit scores to help them evaluate your creditworthiness. A good utilization rate could help you qualify for lower interest rates and a credit limit increase.
Keep in mind that the credit utilization ratio is based on what the credit card and loan companies are reporting to the credit agencies, not a current billing statement.
If you reduce credit card balances and your card issuer reports lower credit card utilization to the credit bureaus, you could see a positive effect on your scores in as little as 30 days.
What happens when credit utilization rises?
Maxed-out cards and high utilization can cause your credit score to drop, and lenders may view you as a greater risk. Loans may be more difficult to get and more expensive.
Some scoring models use trended data to calculate credit utilization and risk. Rather than a monthly snapshot, they look at the past 24 months. With these models, paying off credit card debt may not help your credit utilization score as quickly, so it's better to keep the ratio below 30% consistently.
Myths about credit utilization
Let's dispel some common credit utilization myths.
Myth 1: Carrying a balance helps your score
False. Carrying a balance doesn't help your credit utilization or credit score. In fact, it costs you money in interest. The best practice is to limit credit card usage and pay off balances as quickly as possible.
Myth 2: 0% utilization is bad
Again, false. But if all your cards report 0% utilization, your score may be slightly lower because the credit agencies don't have enough data about your credit behavior. Small, recurring charges that are paid off monthly resolve this.
Myth 3: Utilization doesn’t matter if you pay on time
False again! Credit utilization tends to be a big factor in credit scores, often second only to payment history. Even with a perfect payment history, high utilization could impact your credit score.
FAQs
Credit utilization score or credit utilization ratio represents the percentage of available revolving credit you're currently using. Most experts recommend keeping it at or below 30%.
You could see an improvement in your credit score within 30 days. Card issuers generally report your balances at the end of each statement period, so paying before the period ends will help.
Each credit card account adds to your total available credit, so closing an old account could change the utilization ratio and affect your credit score. Unless a card has annual fees that you think outweigh any benefit to your credit score (and the savings you might see from a higher credit score), keep old cards open.
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