Credit Utilization - What Is It?

by Stable MARK | Updated: December 3, 2022
Stable MARK content is free. When you purchase through referral links on our website, our partners compensate us. Advertiser Disclosure

Credit utilization plays a significant role in determining your credit score. You've probably heard that you should keep your credit utilization low, but you may not know precisely what that means.

This blog post will explain credit utilization and why it's important. We'll show you how you can improve your credit utilization and raise your credit score!

Credit Utilization - What Is It?
Image 1: Credit Utilization - What Is It?

What Is A Credit Utilization Ratio?

Your credit utilization ratio is the proportion of your credit limit that you have borrowed. In other words, it's how much of your available credit you use at any given time. This number is calculated by dividing your total outstanding debt by your credit limit.

Credit Utilization Rate = Your Total Debt
Your Total Available Credit

For example, if your credit limit is $3,000 and you have a balance of $1,000, your credit utilization ratio is 30%.

There are two main uses for credit utilization ratios: lenders use them to determine whether or not you are a good risk for borrowing money, and consumers use them to keep track of their spending habits.

Most financial advisors will tell you that it's a good idea to keep your credit utilization ratio below 30%. That means if you have a $6,000 credit limit, try and keep your balance owed at or below $2,000.

Revolving Credit

As you can see, credit utilization rates are based solely on revolving credit. Revolving credit is a type of credit that allows the borrower to use and reuse the amount of money up to their credit limit. This borrowing option usually has a variable interest rate, which means that your monthly payments can go up or down depending on the prime rate. A big advantage of this borrowing option is that you don’t have to re-apply for credit every time you need it. You can just continue using your line of credit as long as you make at least your minimum monthly payments on time.

Revolving credits are often used by people who need to make large purchases, such as a car or a home. They can also be used for smaller purchases, such as everyday expenses. Many people use revolving credits to consolidate their debts into one monthly payment.

There are two primary types of revolving credits: secured and unsecured. Secured loans are supported by collateral, such as a home or vehicle. Unsecured loans are not backed by collateral and may have higher interest rates.

What Is A Good Credit Utilization Rate?

The answer depends on several factors, but generally speaking, you should aim for a credit utilization rate of 30% or less. That means if you have a total credit limit of $10,000, you should keep your balance below $3,000 at all times. Of course, this isn't always possible - life happens and sometimes we need to use our credit cards to cover unexpected expenses. But if you can keep your utilization rate below 30%, you'll be doing your credit score a favor and will likely see your score improve over time.

In general, a good credit utilization rate is between 30 and 50 percent. However, this number will vary based on your personal circumstances. If you are trying to build or improve your credit score, then you will want to keep your utilization rate below 30 percent. If you are not concerned about your credit score, then you can go above 50 percent.

How Does Your Credit Utilization Ratio Affect Your Credit Score?

Credit utilization has 30% weight in determining your credit score. If you have a high credit utilization ratio, it means you're using a lot of your available credit, which can be a sign of financial instability. This can lead to lenders being hesitant to give you loans or lines of credit, and can also result in higher interest rates. According to data from FICO, the average credit utilization ratio for people with perfect credit scores is just 7%. So if you can keep your own utilization rate below that level, you'll be in good shape.

How Can You Calculate Your Credit Utilization Ratio?

Here's how to calculate your credit utilization ratio: First, add up all of your credit card balances. Then, add up also all of your credit limits. Finally, divide your total balances by your total limits. That's your credit utilization ratio!

If you really want to get into the nitty-gritty of calculating your credit utilization ratio, you can use a formulaic approach. The formula looks something like this: (Total Debts - Total Credits) / Total Credits x 100%. This equation simply divides your total debts by your total credits, then multiplies that number by 100% to get your final percentage. If you want to keep track of your credit utilization ratio, there are a few different ways you can go about it. The most basic method is to check your credit report from one of the three major credit bureaus every so often. This will let you see how much debt you're carrying compared to your total available credit limit. Another way to calculate your credit utilization ratio is to use a free online tool. This credit utilization ratio calculator will provide a breakdown of your current utilization ratio.

Per-Card vs. Overall Utilization — Which Is More Important?

When it comes to credit utilization, there are two schools of thought: per-card and overall. So, which is more important? Well, the answer may surprise you: it’s actually both! Here’s a breakdown of each approach and why both are essential to keeping your credit in good standing. Per-card credit utilization measures the balances on each of your individual cards as a percentage of the card’s credit limit. So, if you have a $1,000 limit on one card and a $5,000 limit on another, and you carry a balance of $500 on the first card and $2,500 on the second, your per-card credit utilization would be 50% for the first card and 50% for the second. Overall credit utilization takes into account all of your revolving debt (from credit cards, lines of credit, etc.) as a whole. So, in the example above, your overall credit utilization would be 20% ($3,000 in debt divided by $15,000 in total available credit). Generally speaking, you want to keep your per-card credit utilization below 30% and your overall credit utilization below 10%. That said, some experts believe that having zero per-card balances is actually better for your score. So, if you can swing it, paying off those balances in full each month is ideal.

Credit Utilization Rate And Credit Cards Balance Reporting

If you're working to improve your credit utilization ratio, it's important to know that credit card companies don't report your balance to the credit bureaus immediately after you make a payment. Instead, they typically update your balance once per month. So, if you're trying to lower your balance to improve your credit utilization ratio, you won't see an immediate impact on your credit score. However, over time as your reports update with lower balances, you should see an improvement in your score.

Should You Open Credit Cards To Improve Your Credit Utilization Rate?

If you're trying to improve your credit utilization rate, you may be wondering if it's a good idea to open new credit cards. After all, won't that give you more available credit and lower your utilization rate? Unfortunately, opening new credit cards can have the opposite effect. First of all, when you open a new credit card, the issuer will do a hard inquiry on your credit report. This can temporarily lower your score by a few points. Additionally, each time you open a new account, your average account age is reduced. This is because lenders like to see a long history of responsible credit use. So even though you may have more available credit with a new card, your score could still go down.

How Closing A Credit Card Can Affect Your Credit Utilization Rate

If you're thinking about closing an existing credit card, it's important to be aware of how this could potentially impact your credit score. By closing a credit card, you will reduce the amount of credit available to you, which could increase your credit utilization rate and negatively impact your score. In addition, another factor used in calculating your credit score is the length of your credit history. If you close an older credit card, you could shorten your overall length of credit history, which could also lead to a lower score. So, while there may be some benefits to closing an unused or unwanted credit card, it's important to weigh these potential consequences before making a decision.

How Can You Lower Your Credit Utilization Ratio?

Keeping your credit utilization ratio low has a few benefits. First, it can help improve your credit score. Second, it can save you money on interest payments. And third, it can give you more flexibility if you need to borrow money in the future. You can do a few things to lower your credit utilization ratio: -Pay down your balances: The most obvious way to lower your credit utilization ratio is to pay down your balances. If you have a balance of $500 on a credit limit of $1,000, bringing your balance down to $250 will halve your credit utilization ratio. -Request a higher credit limit: Another way to lower your credit utilization ratio is to ask your lender for a higher credit limit. If your current credit limit is $1,000 and you request an increase to $2,000, your credit utilization ratio will automatically become 25% ($500/$2,000). -Avoid opening new accounts: Opening new accounts will usually result in a lower credit score, which could lead to a higher interest rate and decreased chances of getting approved for loans or new lines of credit.

The Bottom Line

Your credit utilization ratio has a significant impact on your credit score, so it's best to keep it low. A good rule of thumb is to maintain a credit utilization rate below 30%. If you can keep it even lower, that's even better. By keeping your credit utilization low, you're showing creditors that you're a responsible borrower who uses credit wisely. And that can only help your credit score.

Stay On Top Of Industry Trends

By providing my email address, I agree to’s Privacy Policy