Everything you need to know about credit utilization ratio

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Credit utilization refers to the amount of available credit you’re currently using, and it makes up 30 percent of your credit score, meaning a high credit utilization ratio often correlates with a low credit score. Luckily, there are many ways to lower your credit utilization ratio and work towards better credit.

Why is credit utilization important? When you apply for a new credit card, loan or similar line of credit, lenders want to know how much of your available credit is tied up in debt. A person who runs up high balances or maxes out their credit cards is seen as a greater credit risk than a person who maintains smaller balances or pays off their balances on a regular basis.

Understanding how credit utilization works, how your credit card usage affects your credit utilization rate and how to calculate your credit utilization ratio is an important part of managing your credit. Let’s take a close look at what credit utilization is, why it’s important to keep your credit utilization ratio low and how a credit utilization calculator can help you track your debt-to-credit ratio.

What is a credit utilization ratio?

Your credit utilization ratio is the ratio of your total credit to your total debt and is usually expressed as a percentage. If your credit utilization ratio is 25 percent, it means that you are using 25 percent of the credit available to you. If you have a single credit card with a $10,000 credit limit, for example, a credit utilization ratio of 25 percent indicates that you currently have a $2,500 balance.

If you have more than one credit card, your credit utilization ratio generally refers to the amount of debt you are carrying on all of your credit cards. Depending on the credit scoring model being used, your credit utilization ratio might also include the credit and debts associated with a mortgage, a car loan, student loans and other types of credit.

Since credit utilization makes up 30 percent of your credit score, it’s a good idea to keep your available credit as high as possible—and your debts as low as possible. Running up high balances on your credit cards raises your credit utilization ratio and can lower your credit score.

Let’s take a closer look at how credit utilization affects your credit.

How does your credit utilization ratio affect your credit score?

Under the FICO scoring model, there are five factors that affect your credit score. Each factor makes up a percentage of your total score, as follows:

  • Payment history: 35 percent
  • Credit utilization: 30 percent
  • Credit history: 15 percent
  • Credit mix: 10 percent
  • Credit inquiries: 10 percent

As you can see, the most important factor in your credit score is your payment history—which is why late payments have a huge negative impact on your credit score. Your credit utilization ratio is the second-most important factor that affects your credit score. If you are trying to build good credit or work your way up to excellent credit, you’re going to want to keep your credit utilization ratio as low as possible.

Most credit experts advise keeping your credit utilization below 30 percent, especially if you want to maintain a good credit score. This means that if you have $10,000 in available credit, your outstanding balances should never exceed $3,000. It is all right to occasionally make purchases that exceed 30 percent of your available credit, as long as you pay them off within your grace period and avoid turning them into revolving balances or long-term debt.

The average credit utilization ratio of people with perfect credit scores is 6 percent—so keep that in mind as you calculate your own credit utilization ratio and begin the process of lowering it.

How can you calculate your credit utilization ratio?

If you want to calculate your credit utilization ratio, start by adding up all of the credit limits on your credit cards. If you don’t know your credit limits, you can often find them by logging into your credit card account portal or app.

Once you’ve finished adding up your credit limits, start adding up your current credit card balances. Divide your debt by your credit, then multiply that number by 100 to get the percentage of credit you’re currently using—also known as your credit utilization ratio.

Here’s a sample chart to show you how it works:

Credit limit Outstanding balance Credit utilization ratio
Credit card A $5,000 $250 5%
Credit card B $6,000 $1,600 27%
Credit card C $4,000 $150 4%
Totals $15,000 $2,000 13%

Notice that your total credit utilization ratio is not the sum of each credit card’s individual credit utilization ratio. Percentages don’t work like that, which is why it’s important to calculate your total credit (on all of your credit cards) compared to your total debt.

If you’d rather not do the math by hand, there are many online credit utilization calculators that can help speed up this process. You could also sign up for a credit monitoring app that will automatically calculate your credit utilization ratio for you. The Capital One® CreditWise® app, for example, recalculates your credit utilization ratio every week and lets you know if any changes to your credit utilization ratio have a negative or positive effect on your credit score. CreditWise is free and available to everyone regardless of whether you have a Capital One credit card, so consider adding it to your credit utilization toolkit.

How can you lower your credit utilization ratio?

Lowering your credit utilization ratio is relatively easy—and it’s one of the quickest ways to boost your credit score. Here are four ways for you to reduce your debt, increase your available credit and reap the benefits of a lower credit utilization ratio:

Pay off your balances

The best way to lower your credit utilization ratio is to pay off your credit card balances. Every dollar you pay off reduces your credit utilization ratio and your total debt, which makes it a win-win scenario. Plus, paying off your balances means no longer having to pay interest on those balances. So ask yourself how much debt you can pay off in the next few months, and see how it affects your credit utilization and your credit score.

Open a balance transfer credit card

If monthly interest charges are making it difficult to make a dent in your balances, you might want to consider a balance transfer credit card. These cards let you transfer and consolidate your outstanding balances onto a single credit card, which often makes it easier to pay down your debt. The best balance transfer credit cards offer an introductory zero percent APR period of 15 to 21 months to help you pay off your balances interest-free.

There’s one more benefit to opening a balance transfer credit card: When you take out a new line of credit, you increase the amount of credit under your name. This can help you lower your credit utilization ratio, provided you don’t make additional purchases that take up a significant percentage of your total credit.

Request a credit limit increase

Another good way to lower your credit utilization ratio is to request a credit limit increase from your credit card issuer. By increasing your credit limit, you’ll have more available credit on your account, which will automatically lower your credit utilization ratio. Just be careful that you don’t turn your new credit into new debt!

Apply for a new credit card

Applying for a new credit card is also a good way to lower your credit utilization ratio. Having multiple credit cards associated with your account increases the amount of credit available to you, and if you don’t increase your overall spending, your credit utilization ratio should go down. Plus, getting another card gives you the opportunity to take advantage of credit card rewards, sign-up bonuses and other perks associated with the best credit cards on the market.

Bottom line

Your credit utilization ratio is a major factor in your credit score, so do your best to keep your credit utilization as low as possible. You can use a credit utilization calculator or credit monitoring app to determine your credit utilization rate, or you can do the math by hand.

Reducing your credit utilization ratio is an excellent way to boost your credit score. If you have a lot of high balances and late payments on your record, don’t worry — it’s still possible to turn your credit score around. All you have to do is start making on-time payments every month and begin paying off those balances. As your debt gradually gets smaller, you should see the benefits reflected in your credit utilization ratio and your credit score.