What Is Credit Utilization? (and How to Improve It)
Your credit utilization rate measures the balances of your revolving accounts against your credit limits. Naturally, your ratio can influence your credit scores. A low utilization rate could improve your credit scores while a high utilization rate may hurt them.
For that reason, it’s worth understanding exactly how credit utilization rates work and how they impact your credit. While the math is straightforward—you only need to know addition and division—it’s not always clear which numbers to use.
In This Article
- How Credit Utilization Works
- How Credit Utilization Affects Credit Score
- Why Credit Utilization Is Important to Lenders
- How to Calculate Credit Utilization
- 6 Ways to Improve Credit Utilization
- Personal Loans Can Help Lower Credit Utilization Ratios
- Use Credit Responsibly
Credit utilization refers to the percentage of your total available revolving credit, such as credit cards and personal lines of credit. The balance on installment loans, including personal loans, aren’t part of credit utilization rate calculations, though they can impact your credit score.
You actually have two utilization rates: Individual account utilization and your overall utilization. To determine your individual utilization rate, credit scoring models like FICO divide the reported revolving balance by the credit limit on your card or line of credit. Your overall credit utilization rate is the comparison of all applicable revolving balances and the limits.
Both your overall credit utilization rate and the utilization rate of individual accounts can be important to your credit score.
Credit utilization rates can be a major factor in your credit score. However, the specific impact will depend on the type of credit scoring model and your overall credit profile.
FICO, for example, lists revolving utilization as a subcomponent of the “amount owed” portion of its scoring formula, which can account for about a third of your FICO Score. Meanwhile, VantageScore lists credit usage, balances, and available credit as extremely influential for its scores.
In either case, a low utilization rate—both overall and on individual accounts—is generally better for your score.
As a rule of thumb, making sure your overall utilization rate stays below 30% can be a helpful guideline. However, people with the highest credit scores tend to have utilization rates below 10%. One oddity—a low utilization rate, such as 1%, may be better than no utilization at all. That's because credit scores are designed to predict how you might repay a loan in the future. Having a very low utilization rate is simply easier to predict from than zero debt.
Lowering your utilization rate can be one of the fastest ways to improve your credit score because most scoring models only consider your utilization rate as it is reported. Meaning, you may see a quick credit score boost if you’re able to pay off a high utilization rate at once.
Lenders use your credit scores as a benchmark to determine if you qualify for a new account, as well as what rates and terms to offer you. Because your credit utilization rate can be a major scoring factor, it could have a direct impact on the lender’s decision.
If you have high revolving credit limits and low balances, creditors take that as a sign that you know how to use credit wisely. If you are borrowing heavily against all your credit cards and revolving lines of credit, that can be a sign you’re not as financially responsible as you could be—or are under financial strain.
You can calculate your credit utilization rate by dividing the amount of revolving debt you owe by the amount of credit available.
For example, suppose you have a credit card and a line of credit, each with a limit of $5,000, for a total credit limit of $10,000. You owe $1,000 on the line of credit and $2,000 on the credit card, for a total of $3,000 owed. Given this, your credit utilization ratio is 30%.
There are several key points to remember when calculating utilization rates:
- Many credit card issuers report balances monthly, around the end of each statement period or billing cycle.
- The bill for the statement period may be due around three weeks later.
- Credit scoring models only calculate the balances reported on your credit reports at the time.
- Due to timing constraints, even someone who pays their credit card balance in full each month could have a high credit utilization rate that impacts their credit score.
Keep in mind, if you want to calculate the most accurate utilization rate, review your credit report rather than your current credit card balance. Some credit reports may also include your credit utilization ratio, saving you the math.
In the end, there are only two numbers that matter—the balance and the credit limit—but there are ways to decrease your credit utilization rate and potentially boost your credit scores.
1. Ask for a credit limit increase.As long as your balance doesn’t increase as well, a higher credit limit can lower your utilization rate and make it easier to maintain a low rate. You can ask card issuers for a credit limit increase. However, the request may lead to a hard credit inquiry, which might cause a temporary dip to your credit score.
Also, check the annual income amount you reported to the credit card company, which you can typically find in your online account. If your income has risen, updating the amount may help you get approved for a higher credit limit or lead to an unrequested increase.
2. Pay down credit card balances early.
Lowering your credit card’s balance before issuers report it to the bureaus could also lead to a lower utilization rate. While the reporting often occurs around the end of each statement period, you could call your card issuer to confirm the exact timing.
If you’re carrying a balance, making early payments can also help you save money because credit cards often accrue interest daily.
3. Spread out your spending among different accounts.
While spreading out your charges across several accounts won’t decrease your overall utilization rate, it could keep you from maxing out one of your cards. The utilization rates of your individual accounts can also be scoring factors. So, keeping any single account from having a high credit utilization rate could help your credit scores.
4. Open a new credit card.
Opening a new revolving credit account, such as a credit card, can increase your total available credit. However, keep in mind that a new card may carry an annual fee and could increase the temptation to spend, racking up debt and increasing—rather than helping—your utilization rate.
5. Keep your credit cards open.
If you have a credit card you’re considering closing, you may want to keep it open to maintain more available credit.
Of course, if there’s a specific reason you don’t want the card, such as its annual fee or concerns about overspending, closing it may be a better option. But if the card doesn’t have an annual fee and you rarely use it, keeping it open could help your credit scores.
You could even use the card for a small monthly bill and turn on autopay to ensure on-time payments and avoid account closure due to inactivity. Or, set a calendar reminder to use the card every few months (and another one to pay it off).
6. Become an authorized user on another person's card.
Credit card issuers may report accounts to the credit bureaus under both the primary and authorized users’ names. As an authorized user, you could benefit from having the additional available credit.
But keep in mind: As an authorized user, you’re also giving up some control. For instance, if the primary cardholder generates a high utilization rate, it could show up on your credit report as well. If they fail to make on time payments, your credit scores could also suffer.
There are two ways a personal loan might lower your credit utilization rate.
The first is if you use a personal loan rather than a credit card for a major purchase. Because personal loans are installment accounts, the balance and initial loan amount aren’t part of utilization calculations.
You can also use a personal loan to consolidate credit card debt. In other words, you could take out a loan and use the money to pay off your debt. By eliminating your credit card balances and leaving the cards open, you could significantly lower your utilization rate.
Personal loans may also be easier and less expensive to pay off than credit cards. You’ll have a fixed interest rate, single monthly payment, and know exactly when the loan will be paid off. Plus, the on-time loan payments could help improve your credit.1
You can pre-qualify for a debt consolidation loan and check your rate with LendingClub Bank without impacting your credit score.
Tracking your credit card balances, credit limits, and statement period end dates can be prudent activities from a personal finance perspective. The most active way to manage your utilization rate is to make payments before issuers report your balances to the credit bureaus.
However, you can also maintain a low utilization rate by limiting your expenses, perhaps by budgeting and curtailing bad spending habits, or paying in cash. It’s generally better to avoid using credit cards for big purchases if you can’t afford to pay off your entire statement balance. This helps prevent high-interest credit card debt.
Still have questions? Some of these commonly asked questions may provide the answer.
When is credit utilization calculated?
A credit utilization rate is calculated when a credit scoring model analyzes a credit report. Changes in your credit report, such as a new reported balance on a credit card, can lead to a different utilization rate.
Does credit utilization matter if you pay in full?
Yes, it still matters. Even if you pay your credit card bill in full, you could have a high utilization rate that may hurt your credit scores. Credit card balances are often reported weeks before the bill’s due date, and the reported balance is what impacts your utilization rate.
How does credit utilization affect your credit score?
Credit utilization rates can have a major impact on your credit scores. The specific amount of points will depend on the scoring model and the other information in your credit report. But if you have a high utilization rate, lowering it may be a way to increase your credit scores.
What is a good credit utilization ratio?
There’s no specific point where a utilization rate goes from good to bad. Keeping your overall utilization rate below 30% can be a helpful rule of thumb—but the lower, the better.
1 Reducing debt and maintaining low credit balances may contribute to an improvement in your credit score, but results are not guaranteed. Individual results vary based on multiple factors, including but not limited to payment history and credit utilization.