At a Glance

Credit utilization is the ratio of your outstanding credit card balance to your total credit limit. It plays a crucial role in determining your credit score, and it is recommended to keep your credit utilization under 30%. Anything higher than that may indicate that you are relying too much on credit and may be struggling to keep up with payments. High credit utilization can bring down your credit score, which may make it harder for you to get approved for loans or credit cards in the future. So, keep track of your credit utilization and make timely payments to maintain a healthy score.

## 6%

is the average credit utilization of people with perfect credit scores.

FinFact

## What is credit utilization?

Credit utilization refers to the amount of credit you are currently using compared to the total amount of credit that is available to you. It is usually expressed as a percentage and is a significant factor in determining your credit score.

## How does credit utilization affect your credit score?

Lenders and credit bureaus use credit utilization as an indicator of how responsible you are with credit. If you have a high credit utilization, your score could go down. If you pay off those balance and decrease your credit utilization, your score might bounce back up.

## How is the credit utilization ratio calculated?

Credit utilization ratio is calculated by dividing your total outstanding credit balances by your total available credit limits.

For example, if you have two credit cards with the following details:

Credit card 1: Balance = \$1,000, Credit limit = \$5,000

Credit card 2: Balance = \$500, Credit limit = \$3,000

Your total outstanding balance is \$1,500 (\$1,000 + \$500), and your total available credit limit is \$8,000 (\$5,000 + \$3,000).

To calculate your credit utilization ratio, divide your total outstanding balance by your total available credit limit and then multiply by 100 to get a percentage:

(\$1,500 ÷ \$8,000) x 100 = 18.75%

In this example, your credit utilization ratio is 18.75%, which is well below the recommended threshold of 30%.

It’s important to note that the credit utilization ratio can be calculated for each credit account individually, as well as for all accounts combined. A high credit utilization ratio on any one account can still negatively impact your credit score, even if your overall utilization ratio is low.

## Why does credit utilization ratio affect credit scores?

Credit scoring models, like the FICO score and VantageScore, use credit utilization ratio as a significant factor in determining your credit score. When you apply for credit, lenders want to assess the risk of lending to you. If you have a high credit utilization ratio, it indicates that you are using a large portion of your available credit, which could be a sign that you are overextended financially and may have difficulty paying back debts on time.

On the other hand, a low credit utilization ratio indicates that you are using credit responsibly and can manage your debt effectively. This demonstrates that you are a lower risk borrower and may be more likely to make payments on time.

## What is a good credit utilization ratio?

It’s generally recommended to keep your credit utilization rate below 30%, although the lower, the better. To maintain a healthy credit score, it’s important to pay your bills on time, keep your balances low, and use credit responsibly.

## How to improve your credit utilization ratio?

Improving your credit utilization ratio can positively impact your credit score. Here are some ways you can do so:

• Pay down your balances:The most effective way to improve your credit utilization ratio is to pay down your credit card balances. If you have a balance on a credit card, make payments on time and pay as much as you can to reduce the balance.
• Request a credit limit increase:Another way to improve your credit utilization ratio is to request a credit limit increase from your credit card issuer. A higher credit limit means that you have more available credit, which can lower your credit utilization ratio. However, this may result in a hard inquiry on your credit report, which could temporarily lower your credit score.
• Open a new credit account:Opening a new credit account can increase your total available credit, which can lower your credit utilization ratio. However, it’s important to use this new credit responsibly and avoid accumulating too much debt.
• Keep old credit accounts open:Closing old credit accounts can reduce your total available credit, which can increase your credit utilization ratio. If you have a credit account that you no longer use, keep it open to maintain your total available credit.
• Pay your bills on time:Late payments can negatively impact your credit score and increase your credit utilization ratio if you carry a balance. Make sure to pay your bills on time to avoid late fees and penalties.

## FAQs

Yes, business credit cards count toward credit utilization. Business credit cards are considered a form of credit, and any balances you carry on these cards will be included in your overall credit utilization ratio, just like personal credit cards.

If you have a high balance on a business credit card, it can negatively impact your credit utilization ratio and, ultimately, your credit score. Manage your business credit cards responsibly and keep your balances low, the same way you would a personal card.

A bad credit utilization ratio is generally considered to be any ratio over 30%. This means that if your outstanding balance on your credit accounts exceeds 30% of your total available credit limit, your credit utilization ratio is considered high and may negatively impact your credit score.

Even if you pay your credit card balance in full every month, your credit utilization ratio can still impact your credit score because your credit card balance is reported to credit bureaus at a specific point in time, typically at the end of your billing cycle. If your credit card issuer reports your balance to the credit bureaus before you pay it off in full, your credit report may show a high balance and a high credit utilization ratio.

However, if you pay off your credit card balance in full before your credit card issuer reports your balance to the credit bureaus, your credit utilization ratio will be low or even 0%.

Credit utilization can affect your credit score as long as it is reported to the credit bureaus. Credit card companies generally report your balance and credit limit to the credit bureaus on a monthly basis.

So, if you have a high credit utilization ratio one month, it can lower your credit score for that month. However, if you pay down your balances and lower your credit utilization ratio the next month, your credit score may improve.

Credit utilization typically doesn’t have a long-term impact on your credit score, meaning that it only affects your score for as long as it is reported. Once your credit utilization ratio decreases, your credit score may improve accordingly.