What Is Credit Utilization?: How To Calculate + Improve

Your credit utilization is simple to measure and gets reported monthly to the credit bureaus. A low credit utilization means you are responsible for your finances and aren’t leaning too heavily on credit, which gives lenders more confidence when lending you money. A high utilization can severely impact your score. Here’s everything to know about your credit utilization, plus how to calculate it.

What is credit utilization?

Your credit utilization ratio is the amount of credit you currently use against the total amount available. Creditors see high credit utilization as risky. This can lower your credit score and make it more challenging to be approved for a new credit card or loan.

Types of debt that do and don’t count

Credit utilization is 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. However, your credit score is an important factor in qualifying for a mortgage. Monitoring your credit utilization now can be extremely helpful if you want to buy a house or a car in the future.

How credit utilization impacts your credit score

There are five different factors that are considered when using the FICO model to develop your credit score. Each factor is weighted differently, but credit utilization is one of the most important ones:

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

As you can see, it’s crucial to keep an eye on your credit utilization if you want to increase your score.

What is a good credit utilization ratio?

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 know how to manage your money and that you aren’t a risk to lend to. If you don’t need all of the credit available to you, it’s clear that you’re able to pay off your balances and aren’t spending beyond your means.

How to calculate your credit utilization ratio

To calculate your credit utilization, do the following:

1. Find your total credit limit: Add up your credit limit from all of your credit cards.
2. Find your total credit balance: Add up how much you’ve charged to each card.
3. Divide your credit balance by your credit limit: This will give you a value below 0.
4. Convert to a percentage: Multiply the value from step 3 by 100 to get a percentage.

Let’s look at an example. Let’s say I have four credit cards with the following credit limits:

• Capital One Venture X: $14,100
• Chase Sapphire Preferred: $10,000
• Citi Premier: $6,600
• Apple Card: $4,000

My total credit limit between these four cards would be $34,700. Now, I need to add up the balances on each card:

• Capital One Venture X: I pay my taxes with my Venture X, so I have a balance of $2,500
• Chase Sapphire Preferred: I use this card when I go out to eat, so my balance is $600.
• Citi Premier: I’m planning holiday travel, so the current balance is $1,700.
• Apple Card: I bought a new phone and other accessories, so my balance is $1,100.

My total credit used between these four cards is $5,900. To calculate my credit utilization, I will divide $5,900 by $34,700, which equals 0.17. Multiply that value by 100, and you get a credit utilization ratio of 17%, which is well under the 30% threshold.

Using the same example, I’d want to keep my balances on these cards below a total of $10,410 to have a credit utilization at or below 30%.

How 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 lower it. Remember to take each step cautiously and evaluate how each choice could impact your credit. Your budget and financial situation will determine which one is right for you.

• Request a higher credit limit: As long as you keep your spending the same, a higher credit limit on your card will yield a lower credit utilization ratio.
• Spend less: Using less of your total credit shows you’re responsible with the credit you’re given.
• Set up balance alerts: Some credit card issuers allow you to set up notifications on your account as you near a self-imposed spending limit to avoid going over 30% utilization.
• Make twice-monthly credit card payments: If you can’t lower your spending, paying your card twice a month allows you to keep your balance lower when it gets reported to the credit bureaus.
• Open a new credit card: Opening a new card will increase your total credit limit and help lower your utilization.
• Don’t close old cards: Closing a card means you no longer have access to that credit, which will lower your utilization ratio.

FAQs

Bottom line

Your credit utilization plays a major role in determining your credit score. It’s easy to calculate and keep track of throughout the month as you work on improving your score. Remember, try your best to keep your utilization below 30%, as it shows lenders you’re responsible when managing your money and that you don’t need all of the credit available to you.