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Credit utilization: How your credit card use affects this important ratio

Yahoo Personal Finance· Getty Images
Kendall Little
·Senior Writer, Credit Cards
Updated 5 min read

If you want to build a great credit score, don’t overlook your credit utilization.

Your credit score gives lenders an idea of how well you can borrow and manage the loans and credit cards on your credit report. Credit utilization, or the amount of available credit you’re currently using, is among the most influential factors — and one that you can take steps to improve today. Here’s how.

Credit utilization represents the amount of credit (on your revolving credit accounts) you’re currently using in relation to the amount that you have available. It factors into your credit score as part of your total amounts owed, which makes up 30% of the overall score.

Credit utilization is expressed as a ratio. If you have a $10,000 credit limit, for example, and a $4,000 balance, your credit utilization ratio is 40%.

Your credit score accounts for both individual card utilization and utilization across all of your eligible accounts. Those ratios help lenders get an idea of how well you manage the credit available to you. If you often spend close to your limits, you might look more risky to potential lenders.

But how low should your credit utilization ratio be to stay favorable? In short: as low as possible.

A good credit utilization ratio is generally considered anything below 30%. But keeping your ratio closer to 10% or lower is best to build credit and maintain a great score, according to FICO.

To find your credit utilization ratio on a single credit card, simply divide the balance you owe by the card’s credit limit. You can then find your overall credit utilization by adding up the credit limits and card balances on all your credit accounts and dividing similarly.

Let’s say you have two credit cards. One is a cash-back credit card for regular grocery and gas spending, and the other is a balance transfer credit card you’re using to pay down debt.

In this example, you have a solid credit utilization on your everyday card, while the balance transfer card has a high credit utilization. In total, your overall utilization rate is around 46.6% — well above the recommended ratio.

Of course, as you pay your balance down using the balance transfer card, that rate will quickly drop. Credit utilization isn’t a fixed number; as your card use evolves and your issuers report to the credit bureaus each month, your credit utilization ratio — and its effect on your score — will change.

That’s why it’s smart to watch your spending and keep your balances low whenever possible. Not only can you avoid high interest charges that come with carrying a card balance, but you’ll also see the benefit of a lower utilization ratio in your credit score.

Pay attention to credit utilization even if you pay your balances in full each month. Your card balance may be reported to the bureaus before you make your monthly payment. Even if you pay your card balances off to avoid interest, it’s important to keep your spending well below your credit limit.

Credit card utilization is a significant part of your overall credit score since it’s part of the “amounts owed” scoring factor. The only factor that’s more influential is your payment history.

But credit utilization isn’t the only part of the amounts owed equation. The amount you still owe toward your mortgage, personal loans, student loans, and other debts are included, too. As you pay down the money you borrowed, you can show lenders that you’re able to manage your debts.

However, credit utilization is still a major part of the amounts owed factor and your overall credit score. Lenders may consider you more creditworthy if you’ve proven your ability to keep within your current spending limits and not overextend yourself beyond what’s available.

To keep a good credit score long-term, it’s important to maintain a low credit utilization. These actions can help:

  1. Pay more than the minimum. Paying your card off in full each month will help you avoid costly interest payments, but it can also be good for your credit utilization. The higher you let your balances grow by only making credit card minimum payments, the closer you’ll get to your credit card limit — which will increase your utilization ratio.

  2. Spend what you can afford. The best way to keep your card balances to an amount you can pay down each month? Take care not to overspend and charge only what you can afford. If you use your credit card like a debit card and only spend an amount you know you can pay off, you’ll avoid debt and benefit your credit utilization.

  3. Make payments often. Your credit utilization is based on the balance reported to the credit bureaus by your credit card issuer. Even if you do pay it off in full, the issuer may report the amount before your due date. It can be useful to make multiple payments toward your balance each month to keep your reported balances low, no matter when they’re sent to the bureaus. You might, for example, make a payment to your card each two-week pay period rather than waiting for your monthly statement. Just make sure you’re still tracking the due date so you don’t accidentally miss a payment or pay late.

  4. Don’t close older accounts. Before you close an old credit card account (even if you rarely use the card), consider how you might still benefit from keeping the account open. Because that card’s spending limit counts towards your overall credit utilization, it could be useful to help you maintain a low utilization ratio. This is best for cards that don’t have an annual fee or other costs — if you’re paying to keep a card open that you no longer use, you’re probably better off closing it and focusing on keeping your credit utilization low in other ways.

  5. Request a credit limit increase. With a higher credit limit, you’ll gain more flexibility in the amount you can spend within the ideal credit utilization range. You may be able to request the credit line increase through your online account or be granted a higher limit after showing a positive payment history or an increase in your income.

This article was edited by Alicia Hahn

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