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What is your credit utilization ratio?

Your credit utilization ratio is a percentage that shows how much of your available credit you’re currently using. This is typically measured for each of your credit cards and across your total revolving credit lines.

Why does your credit utilization ratio matter?

Keeping a low credit utilization ratio across your credit cards should be a top priority because of how heavily it influences your credit score. In fact, the amount you owe compared to your available credit makes up about 30 percent of your score according to both major credit scoring models, FICO and VantageScore. Credit utilization is the second biggest factor in your credit rating—right behind your payment history. This can be a double-edged sword since it’s perhaps the easiest element to control in the short term but can reduce your score just as quickly. Maintaining low balances with high credit limits shows lenders that you’re a responsible borrower, which can improve your credit score and open the door to credit line increases, better credit card and loan terms, easier credit approval and more. On its own, a high balance doesn’t necessarily spell trouble to issuers if you have a much higher credit limit. However, a high utilization ratio may make you seem like more of a risk to lenders and can lower your credit score, make new credit applications difficult and even lead to credit limit decreases—which can further damage your score and utilization ratio.

How do you calculate credit utilization?

All you need to do to determine each your credit utilization ratio for an individual card is divide your balance by your credit limit. To figure out your overall utilization ratio, add up all of your revolving credit account balances and divide the total by the sum of your credit limits.
  • Credit Card Utilization Ratio Formula: (Credit Card Balance) ÷ (Card’s Credit Limit)
  • Total Credit Utilization Ratio Formula: [(Credit Card 1 Balance) + (Credit Card Balance 2 or Other Revolving Credit Line Balance), etc.] / [(Card 1 Credit Limit) + (Card 2 Credit Limit or Other Revolving Credit Line’s Limit), etc.]
For example, having a $500 balance on a card with a $5,000 credit limit would give you a 10 percent credit utilization rate on that card. If you have two other credit cards—one with a $2,000 balance, one with a $200 balance, and both with $5,000 credit limits—your total credit utilization would be 18 percent.

What is a good credit utilization ratio?

A popular rule of thumb lists any rate below 30 percent as a good credit utilization ratio, but there’s no specific credit utilization threshold that will help or hurt your score. Instead, simply try to keep your balance and utilization ratio as low as possible for the best chance at improving your score.

How do you lower your credit utilization ratio?

There are two ways to lower your credit utilization ratio: Reduce your balances or increase your available credit. Applying for a higher credit limit or a new credit card can give you more credit utilization breathing room and boost your credit score in the process. If you’re having trouble paying off your balance, a balance transfer credit card can not only help you keep interest at bay long enough to settle your balance, but can also lower your utilization ratio via more available credit.