Back to articlesHow Credit Utilization Works
By Michelle Lambright Black
Published on: 11/20/2024
Published on: 11/20/2024
Credit utilization is a key factor that influences your credit score. This term describes the connection between your credit card limits and balances—or, more accurately, how you manage that critical balance-to-limit relationship.
Another term for credit utilization is revolving utilization because it sometimes describes other revolving credit accounts like personal lines of credit or home equity lines of credit (HELOCs). But for the purposes of this article, we’ll mainly focus on credit cards and how your credit utilization ratio impacts your credit score.
Overall, lower credit utilization ratios tend to be better for your credit score while higher credit utilization ratios may lead to credit score damage. Aside from the payment history on your credit report, credit utilization ratio can be one of the most influential factors to impact your credit score.
If your goal is to establish a good credit score, it’s critical to learn how credit utilization works and the ideal ratio you should maintain on your credit card accounts. Here’s what you need to know.[1]
When your credit report shows that you’re using a lower percentage of your credit card limit, the impact on your credit score is typically positive. But if a credit card company reports that your balance-to-limit ratio is high, your credit score might suffer instead (at least until you pay down your balance).
When it comes to your credit scores, credit scoring models like FICO typically consider two types of credit utilization.
For example, imagine you owe $2,000 on two credit cards and your total credit limits add up to $8,000. In this scenario, you would divide $2,000 (total revolving balance) by $8,000 (total credit limit) and multiply the result by 100 to discover that your overall credit utilization ratio is 25%. (Example: $2,000 total balance ÷ $8,000 total credit limit = 0.25 X 100 = 25%.)
Remember, when a credit scoring model calculates your credit score, it considers both your total credit utilization ratio and the credit utilization ratio of each individual credit card. You can calculate the credit utilization rate on a single credit card by dividing the balance on that account by the credit limit and multiplying the result by 100 (e.g., a $1,000 balance ÷ $2,000 credit limit = 0.5 x 100 = 50% utilization ratio).
Credit utilization also influences 20% of your VantageScore credit score. So no matter what credit scoring model a lender uses to calculate your credit score, the way you use your credit cards can have a meaningful impact on your results.[5]
When your credit utilization ratio rises, it often signifies that you have more credit card debt. As a result, you could struggle to pay your credit obligations back in an efficient manner.
According to recent data from the Federal Reserve of New York (Q1 2024), borrowers who were current on all of their credit cards had a median utilization ratio of 13%. Yet newly delinquent borrowers had a median utilization ratio of 90% by comparison. So, it’s easy to see why credit scoring models use credit utilization as a key factor to measure the likelihood of future late payments.[6]
Instead, you want to aim to keep your credit utilization rate as low as possible. A lower balance-to-limit ratio tends to be the best approach where your credit score is concerned.[8]
There is, however, one exception to this rule. You typically don’t want to keep a credit utilization ratio of 0% on your credit reports. Doing so indicates that you’re not using your credit card accounts and might prevent you from earning the maximum credit score points possible in the “Amounts Owed” category of your credit report.[7]
Yet even if you pay your credit card in full each month, you might still wind up with a high utilization ratio on your credit report because of the way credit card billing cycles work. If your goal is to maximize your credit score, not only is it important to pay your full credit card balance each month, but when you pay your bill also matters.
To keep your credit card account in good standing and avoid late payments, you should always pay your bill on or before the due date on your statement. For a low credit utilization ratio, however, it’s better to pay your credit card bill early—before the statement closing date on your account.
Credit card companies don’t update the major credit bureaus (Equifax, TransUnion, and Experian) regarding the details of your credit card account in real time. For example, your credit report doesn’t change every time you make a charge or a payment on your credit card. Instead, your card issuer typically only updates the credit bureaus about how you’re managing your credit card account once a month—after your statement closing date.
If you pay your bill before the statement closing date on your account, you should wind up with a lower statement balance on your credit report. And if the balance on your account is lower for the upcoming month, your credit utilization ratio should be lower as well. By comparison, if you wait until your due date to pay your bill you’ll be on time, but the balance on your credit report (and therefore your credit utilization rate) may be higher for the upcoming month.[9]
A good budget, however, can help you avoid potential pitfalls. When you create the right strategies to manage your money, you can not only keep your credit utilization ratio in check but you can also make sure the income you earn is helping you accomplish the financial goals that matter most to you in the long run.
On a positive note, there are numerous financial apps available that can help you track your monthly credit card usage and make it easier to avoid overspending. You can search for budgeting apps online to find a free or paid service that offers features to meet your needs.
When you decide to start paying down credit card debt, it’s a good idea to create a debt payoff plan based on your financial goals. Two of the most popular debt elimination strategies are as follows.
On the other hand, debt consolidation does have the ability to backfire if you don’t handle this financing strategy with care. You typically need at least a good credit to qualify for a debt consolidation loan or balance transfer credit card with a decent interest rate.[10]
Some people incorrectly believe that you shouldn’t close old credit cards because doing so will impact your length of credit history—a credit scoring category that makes up 15% of your FICO Score. Yet in reality, even closed accounts may stay on your credit report for around 10 years. And as long as an account is on your credit report, it may factor into your length of credit history calculations where FICO Scores are concerned. (Note: From a FICO Score standpoint, an older length of credit history is better.)[11]
The real reason you should generally avoid closing old credit cards is because doing so might cause a spike in your credit utilization ratio. When you close a credit card, you lose some of your available credit. And if your credit report shows that you’re carrying a balance on any of your credit cards—now or in the future—the loss of that available credit will cause your credit utilization ratio to increase (unless you replace it with another source of credit).[12]
If you’re worried you might start spending more money on your account after you have more available credit, you should avoid this strategy. It’s worth noting that you’ll probably wind up with a new hard inquiry on your credit report when your credit card company checks to see if you’re eligible for a higher credit limit as well.
A hard credit inquiry could have a slightly negative impact on your credit score (typically less than five points for most consumers). But if you qualify for the higher credit card limit and it reduces your credit utilization ratio, the inquiry may be worth it.[13]
Yet keep in mind that it’s important to become an authorized user on a credit card where the primary cardholder maintains a low balance-to-limit ratio. If someone adds you to a credit card with a high credit utilization rate or to an account with a late payment history, that action could backfire and might hurt your credit score rather than help you.
Another term for credit utilization is revolving utilization because it sometimes describes other revolving credit accounts like personal lines of credit or home equity lines of credit (HELOCs). But for the purposes of this article, we’ll mainly focus on credit cards and how your credit utilization ratio impacts your credit score.
Overall, lower credit utilization ratios tend to be better for your credit score while higher credit utilization ratios may lead to credit score damage. Aside from the payment history on your credit report, credit utilization ratio can be one of the most influential factors to impact your credit score.
If your goal is to establish a good credit score, it’s critical to learn how credit utilization works and the ideal ratio you should maintain on your credit card accounts. Here’s what you need to know.[1]
What does credit utilization mean?
Your credit utilization ratio is a measure of how much available credit you’re using on your credit card accounts, expressed as a percentage. For example, if you have a credit card account with a $2,000 credit limit and you owe a $1,000 balance, your credit utilization rate is 50%. In this scenario, you’re using 50% of your available credit, also known as your credit limit.When your credit report shows that you’re using a lower percentage of your credit card limit, the impact on your credit score is typically positive. But if a credit card company reports that your balance-to-limit ratio is high, your credit score might suffer instead (at least until you pay down your balance).
When it comes to your credit scores, credit scoring models like FICO typically consider two types of credit utilization.
- Overall credit utilization: The percentage of available credit you’re using across all credit card accounts combined.
- Individual credit utilization: The percentage of available credit you’re using on each individual credit card account.[2]
Calculating your credit utilization ratio
If you want to figure out your own overall credit utilization ratio, you can start by adding up the balances on all of your revolving credit card accounts combined. Next, separately add the credit limits on all of your credit card accounts. From there, divide your total credit card balances by the total credit limits and multiply that result by 100. The answer is your credit utilization ratio. (Credit card balances / credit card limits X 100 = credit utilization ratio).[3]For example, imagine you owe $2,000 on two credit cards and your total credit limits add up to $8,000. In this scenario, you would divide $2,000 (total revolving balance) by $8,000 (total credit limit) and multiply the result by 100 to discover that your overall credit utilization ratio is 25%. (Example: $2,000 total balance ÷ $8,000 total credit limit = 0.25 X 100 = 25%.)
Remember, when a credit scoring model calculates your credit score, it considers both your total credit utilization ratio and the credit utilization ratio of each individual credit card. You can calculate the credit utilization rate on a single credit card by dividing the balance on that account by the credit limit and multiplying the result by 100 (e.g., a $1,000 balance ÷ $2,000 credit limit = 0.5 x 100 = 50% utilization ratio).
How does your credit utilization ratio impact your credit score?
Your credit utilization ratio isn’t the most important factor that affects your credit score, but it’s close to the top. Payment history—or details regarding how you’ve managed your credit obligations in the past— accounts for 35% of your FICO® Score. Meanwhile, credit utilization along with other factors in the “Amounts Owed” category of your credit report help determine 30% of your FICO® Score.[4]Credit utilization also influences 20% of your VantageScore credit score. So no matter what credit scoring model a lender uses to calculate your credit score, the way you use your credit cards can have a meaningful impact on your results.[5]
Does higher credit utilization decrease your score?
It’s important to understand that when you use a higher percentage of your credit card limit, your credit score will typically decline. The reason this happens is that a higher credit utilization ratio can indicate elevated credit risk.When your credit utilization ratio rises, it often signifies that you have more credit card debt. As a result, you could struggle to pay your credit obligations back in an efficient manner.
According to recent data from the Federal Reserve of New York (Q1 2024), borrowers who were current on all of their credit cards had a median utilization ratio of 13%. Yet newly delinquent borrowers had a median utilization ratio of 90% by comparison. So, it’s easy to see why credit scoring models use credit utilization as a key factor to measure the likelihood of future late payments.[6]
What is good credit utilization?
It’s common to find advice from financial experts recommending that you should keep your credit utilization rate below 30%. Yet according to FICO, there’s no data to support the idea that your credit score will decline when your credit utilization ratio crosses over the 30% threshold.[7]Instead, you want to aim to keep your credit utilization rate as low as possible. A lower balance-to-limit ratio tends to be the best approach where your credit score is concerned.[8]
There is, however, one exception to this rule. You typically don’t want to keep a credit utilization ratio of 0% on your credit reports. Doing so indicates that you’re not using your credit card accounts and might prevent you from earning the maximum credit score points possible in the “Amounts Owed” category of your credit report.[7]
Does credit utilization matter if you pay in full?
The best way to manage a credit card is to consistently pay off your full statement balance each month. When you exercise this smart habit, you can take advantage of the benefits your credit card has to offer without having to pay expensive credit card interest charges.Yet even if you pay your credit card in full each month, you might still wind up with a high utilization ratio on your credit report because of the way credit card billing cycles work. If your goal is to maximize your credit score, not only is it important to pay your full credit card balance each month, but when you pay your bill also matters.
To keep your credit card account in good standing and avoid late payments, you should always pay your bill on or before the due date on your statement. For a low credit utilization ratio, however, it’s better to pay your credit card bill early—before the statement closing date on your account.
Credit card companies don’t update the major credit bureaus (Equifax, TransUnion, and Experian) regarding the details of your credit card account in real time. For example, your credit report doesn’t change every time you make a charge or a payment on your credit card. Instead, your card issuer typically only updates the credit bureaus about how you’re managing your credit card account once a month—after your statement closing date.
If you pay your bill before the statement closing date on your account, you should wind up with a lower statement balance on your credit report. And if the balance on your account is lower for the upcoming month, your credit utilization ratio should be lower as well. By comparison, if you wait until your due date to pay your bill you’ll be on time, but the balance on your credit report (and therefore your credit utilization rate) may be higher for the upcoming month.[9]
Tips for keeping credit utilization low
Keeping a low credit utilization ratio is essential if you want to earn and keep healthy credit. Below are some tips that may help you accomplish this goal.
1. Create a budget
As a general rule, it’s not a good idea to spend money without a plan—otherwise known as a budget. When you use a credit card without knowing how you’ll pay off the charges, it’s easy to end up with a high credit utilization rate, piles of credit card debt, and several other financial problems that could damage your credit score and cost you money in interest and fees.A good budget, however, can help you avoid potential pitfalls. When you create the right strategies to manage your money, you can not only keep your credit utilization ratio in check but you can also make sure the income you earn is helping you accomplish the financial goals that matter most to you in the long run.
2. Track your credit card usage
Once you build a budget to manage your spending, it’s important to track your credit card usage and make sure you stick with the plan. If you overspend your budget categories and charge more on your credit cards than you intended, it’s easy to increase your credit utilization ratio and create more credit card debt than you can afford to pay off.On a positive note, there are numerous financial apps available that can help you track your monthly credit card usage and make it easier to avoid overspending. You can search for budgeting apps online to find a free or paid service that offers features to meet your needs.
3. Pay down debt
One of the smartest ways to reduce your credit utilization ratio is to pay down your credit card balances. Not only does this strategy have the potential to lift your credit score, but it could also save you money in expensive credit card interest charges as well.When you decide to start paying down credit card debt, it’s a good idea to create a debt payoff plan based on your financial goals. Two of the most popular debt elimination strategies are as follows.
- Debt snowball: With this debt payoff plan, the idea is to repay your smaller debts first. List your credit card debts from the smallest balance to the largest. And make at least the minimum payment due on each account monthly. From there, pay as much money as possible toward the smallest debt on your list each month. Once you eliminate the smallest debt, move up the list to the next smallest amount and repeat the process until you pay each debt in full.
- Debt avalanche: With this debt payoff strategy, the goal is to save as much money in interest as possible while reducing your overall debt. To begin, list your outstanding debt in order from the highest to lowest interest rate. Next, make the minimum payment due on every credit card each month to avoid late fees and late payments on your credit report. But you’ll want to focus any extra cash you have toward paying off the account with the highest interest rate first. Once you pay off that account, move down the list to the account with the next highest interest rate and repeat the process until you pay off all of your balances.
4. Consider debt consolidation
If you have a significant amount of credit card debt you’re working to eliminate, you might want to consider adding a debt consolidation method to your payoff plan. Debt consolidation has pros and cons which you should examine in detail. But if you manage this type of financing tool with caution, a debt consolidation loan or balance transfer credit card may help you reduce your credit utilization ratio, pay off your credit card balances faster, and potentially lift your credit score at the same time.On the other hand, debt consolidation does have the ability to backfire if you don’t handle this financing strategy with care. You typically need at least a good credit to qualify for a debt consolidation loan or balance transfer credit card with a decent interest rate.[10]
5. Avoid closing old credit cards
As a rule of thumb, it’s typically a bad idea to close old, unused credit cards. Closing a credit card has the potential to damage your credit score.Some people incorrectly believe that you shouldn’t close old credit cards because doing so will impact your length of credit history—a credit scoring category that makes up 15% of your FICO Score. Yet in reality, even closed accounts may stay on your credit report for around 10 years. And as long as an account is on your credit report, it may factor into your length of credit history calculations where FICO Scores are concerned. (Note: From a FICO Score standpoint, an older length of credit history is better.)[11]
The real reason you should generally avoid closing old credit cards is because doing so might cause a spike in your credit utilization ratio. When you close a credit card, you lose some of your available credit. And if your credit report shows that you’re carrying a balance on any of your credit cards—now or in the future—the loss of that available credit will cause your credit utilization ratio to increase (unless you replace it with another source of credit).[12]
6. Consider asking for a credit limit increase
Another possible way to lower your credit utilization rate is to ask your credit card company for a higher credit limit. But keep in mind that this approach only works if (a) your card issuer approves the request and (b) you keep your credit card balance the same or lower after the credit limit increases.If you’re worried you might start spending more money on your account after you have more available credit, you should avoid this strategy. It’s worth noting that you’ll probably wind up with a new hard inquiry on your credit report when your credit card company checks to see if you’re eligible for a higher credit limit as well.
A hard credit inquiry could have a slightly negative impact on your credit score (typically less than five points for most consumers). But if you qualify for the higher credit card limit and it reduces your credit utilization ratio, the inquiry may be worth it.[13]
7. Become an authorized user
Asking a friend or family member to add you as an authorized user on their existing credit card is another possible way to lower your overall credit utilization ratio. This approach could be especially helpful if the account in question has a high credit limit (and a consistently low statement balance).Yet keep in mind that it’s important to become an authorized user on a credit card where the primary cardholder maintains a low balance-to-limit ratio. If someone adds you to a credit card with a high credit utilization rate or to an account with a late payment history, that action could backfire and might hurt your credit score rather than help you.
Bottom line
Although credit utilization isn’t the only detail that affects your credit score, it is a key factor. So, if you want to maintain your credit health now and in the future, it’s a good idea to focus on keeping your credit utilization ratio in check. As an added bonus, when you work to keep your credit utilization low, your efforts might also help you avoid credit card debt which could lead to a host of other financial problems.Sources
- Chase.com. “What is credit utilization?” https://www.chase.com/personal/credit-cards/education/credit-score/what-is-credit-utilization-ratio-and-how-does-it-work
- myFICO.com. “What Should My Credit Utilization Ratio Be?” https://www.myfico.com/credit-education/blog/credit-utilization-be
- Discover.com. “What Is Your Credit Utilization Ratio?” https://www.discover.com/credit-cards/card-smarts/what-is-your-credit-utilization-ratio/
- myFICO.com. “What Is Amounts Owed?” https://www.myfico.com/credit-education/credit-scores/amount-of-debt
- VantageScore.com. “VantageScore 4.0 Overview.” https://www.vantagescore.com/wp-content/uploads/2022/02/VS4-Overview-WP-FNL.pdf
- LibertyStreetEconomics.NewYorkFed.org. “Delinquency Is Increasingly In the Cards for Maxed-Out Borrowers.” https://libertystreeteconomics.newyorkfed.org/2024/05/delinquency-is-increasingly-in-the-cards-for-maxed-out-borrowers/
- myFICO.com. “What Should My Credit Utilization Ratio Be?” https://www.myfico.com/credit-education/blog/credit-utilization-be
- Experian.com. “What Is a Credit Utilization Rate?” https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/
- Chase.com. “What is a credit card closing date?” https://www.chase.com/personal/credit-cards/education/basics/what-is-a-closing-date-on-a-credit-card#:~:text=The%20
- Experian.com. “Pros and Cons of Debt Consolidation.” https://www.experian.com/blogs/ask-experian/pros-and-cons-of-debt-consolidation/
- myFICO.com. “How to Decide Whether It’s Time to Close a Credit Card.” https://www.myfico.com/credit-education/blog/close-credit-card
- myFICO.com. “Will Closing a Credit Card Help My FICO Score?” https://www.myfico.com/credit-education/faq/cards/impact-of-closing-credit-card-account
- myFICO.com. “Credit Checks: What are credit inquiries and how do they affect your FICO Score?” https://www.myfico.com/credit-education/credit-reports/credit-checks-and-inquiries
About the author
Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).Editorial policy
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).
Written on November 20, 2024
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