How to Calculate Your Credit Utilization (and Improve It)

Learn all about credit utilization is and why it matters.
5 minute read | 7/2/19July 2, 2019
woman doing credit utilization by checking out

Keeping up with your credit score isn’t always easy, especially if you aren’t sure how it’s calculated. There are five parts to your FICO score, and each factor is weighted differently:

  • Payment history: 35%
  • Credit utilization: 30%
  • Length of credit history: 15%
  • Credit mix: 10%
  • New credit: 10%

Although there are many parts to determining your score, your credit utilization is one of the most important ones. Here’s what your credit utilization is, how it’s calculated, and how to improve it if you need to.

What is credit utilization?

Credit utilization is the amount of credit you’re using out of all the credit available to you.

Using a lot of your available credit on a constant basis may not seem so bad, especially if you’re paying it off every month. But creditors see high credit utilization as risky, and maxing out your credit cards can have a negative impact on your FICO score.

It’s commonly advised to aim for a credit utilization of 30% or less. That means you’re using 30% of your total available credit. This shows lenders you’re responsible with your credit by not maxing it out.

How is your credit utilization calculated?

Your credit utilization ratio is the percentage you get when you divide how much you owe by your total credit limit.

It’s calculated using all your revolving credit accounts, such as credit cards and other lines of credit. “Revolving credit” refers to money you can borrow and pay back on an ongoing basis.

Debt like mortgages or student loans won’t show up in your credit utilization ratio. They’re what are known as installment loans, where you borrow one lump sum and pay it back in installments over a set amount of time. Once it’s paid off, the loan terms are complete, and the account is closed.

To calculate your credit utilization, find your total credit limit by looking at all of your credit cards and lines of credit. For example, if you have two credit cards that each have $7,500 limits, your total credit limit is $15,000.

Then look at how much you’ve charged to the cards. Say one card has a balance of $1,000 and the other has a balance of $4,000, for a total of $5,000.

To calculate your credit utilization, divide the amount of credit you’re using ($5,000) by your total credit limit ($15,000), then multiply that number by 100 to give you a percentage. In this example, your credit utilization is 33%.

Here’s how that calculation works out for a number of different credit limits:

Total credit limit Spending limit for 30% credit utilization
$5,000 $1,500
$10,000 $3,000
$15,000 $4,500
$20,000 $6,000
$25,000 $7,500
$30,000 $9,000

While paying off your balance every month is important, your accounts are reported to the credit bureaus at different times. This means that even if you pay your bill off in full every month, carrying a high balance at any point could potentially harm your credit utilization. If you’re particularly concerned with your credit score and want to improve it, try to keep your credit card spending at 30% or less of your credit limit.

6 ways to improve your credit utilization

If you’ve done the math and your credit utilization is higher than it should be, there are ways to get it lowered. Not every method may work for you, so choose the one that’s best for your situation.

1. Request higher credit limits

If you’re good about making payments every month and have been with the same lender for a while, talk to your credit card issuer about increasing your credit card limit.

This will instantaneously lower your credit utilization since you’ll have a higher total limit. Consider the above example: If your total credit limit was once $15,000 and is increased to $20,000, your credit utilization would be 25% rather than 33%.

If you tend to miss payments or pay late, however, your issuer may be hesitant to give you a limit increase. If you get denied, ask what they’d recommend you do to get a boost.

2. Spend less on your credit cards

It’s a little weird when you look at it, right? The less you spend, the more your credit score could increase in this case.

Using less of your total credit shows you’re responsible with the credit you’re given. To do this, simply use cash or a debit card to pay for more purchases instead of your credit card. This is also a good opportunity to review your budget to make sure you’re not wasting money on things you don’t need.

3. Set up balance alerts

Some credit card issuers allow you to set up notifications on your account for various things, such as your monthly due date and possible fraud.

But some cards may also allow you to set up alerts as you near a self-imposed spending limit. For example, if you have a $5,000 credit limit, you can get notified when you’re getting close to your 30% utilization, or $1,500. This can help you monitor your spending and stay on track.

4. Make twice-monthly credit card payments

If you’re used to making monthly payments — even with autopay — you may want to try paying more often.

Paying your card twice a month allows you to keep your credit card balance lower, which can help your credit utilization. This is also helpful if you get paid twice a month; you can devote money from each paycheck to paying down some of your credit card balance.

5. Open a new credit card

Opening a new card will increase your total credit limit and help lower your utilization. If you have a good credit score and you never miss a payment, this could likely be relatively easy to accomplish.

But applying for a credit card could also cause a temporary dip in your credit score. Opening a new account means a hard inquiry will appear on your report, which dings your credit score. It could also lower the average age of your credit history, which factors into your credit score, too.

While not forever, it might hurt your chances of getting approved for credit in the immediate future. For instance, if you’re planning on applying for a home or car loan soon, it may be best to wait until you’re approved before opening a new credit card.

If you decide this is the best option for you, check out our recommendations for best credit cards

6. Don’t close old cards

If you have credit cards you don’t use anymore, it might seem like a good idea to close the card. After all, closing the card will help make sure you don’t use it.

But be careful when canceling old cards. Closing them can cause your credit utilization to drop, since your total credit limit will decrease. It can also impact the length of your credit history; the longer your credit history, the better off your score is.

Do you need to lower your credit utilization?

If you’ve discovered your credit utilization is higher than it should be, don’t panic — there are plenty of ways to lower it.

Remember to take each step with caution and evaluate how your overall credit could be impacted with each choice. Your budget and financial situation will determine which one is right for you.

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