What Is Credit Utilization? A Guide to Managing Your Credit Usage

Credit utilization is the amount of your available revolving credit you're using. It's a major factor in determining your credit score, and can help or hinder your access to financial products like loans and credit cards.

Understanding how credit utilization works can help you take the necessary steps to maintain a healthy ratio and improve your credit.

What is a credit utilization ratio?

Your credit utilization ratio is the percentage of your available credit you're currently using. To find out what your credit utilization ratio is, add up all your credit card balances, then add up all your credit card limits, and divide your total balance by your total credit limit. You then multiply this number by 100 to find out the percentage:

Credit utilization ratio = (Total credit card balance / Total credit limit) x 100

To further understand credit utilization, consider the table below, which shows an individual's current credit card balances and limits:

Using the calculation from earlier, you can see that the person has a 20% credit utilization ratio, meaning they're using 20% of their total available credit:

($3,600 / $18,000) x 100 = 20%

How does credit utilization affect your credit score?

Your credit utilization ratio can positively or negatively affect your score. A higher credit utilization ratio will lead to a lower score since it indicates that you might be overextended, while a lower credit utilization ratio will result in a higher score, as it shows that you're responsible with your credit.

However, the precise way credit utilization affects credit scores depends on the credit scoring model.

According to FICO's most recent scoring model, credit utilization (or “amounts owed”) accounts for 30% of your credit score, making it the second most significant factor after payment history (35%).

VantageScore weighs credit utilization at 20% of your score. The age of your credit accounts (depth of credit) also accounts for 20% of your score, while your payment history represents 41%.

Unlike missed payments, which can affect your credit for years, credit utilization is fluid, meaning it can change monthly as you pay down or increase credit balances.

“It is important to know that your current credit utilization level doesn't leave a permanent mark, meaning that the consequences of high utilization this month can be reversed by improvements in the months ahead,” says Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling (NFCC).

Of course, a consistent history of high credit utilization can keep your score low, but if you need to rely on your credit cards a bit more than usual for one month, it won't have a lasting effect on your score — just make sure to pay down your debt as quickly as possible.

What's a good credit utilization ratio?

“A good credit utilization percentage is generally considered to be below 30% of your available credit,” McClary explains. “However, experts often recommend aiming for a utilization rate of 10% or lower for more manageable debt levels and improved credit.”

The higher your credit utilization gets, the more likely it is to negatively affect your credit score and make it harder to access various financial products, such as credit cards, auto loans, mortgages, and private student loans.

“Generally speaking, lower credit card utilization is considered less risky than higher credit utilization,” notes Tommy Lee, senior director of B2B scores and predictive analytics at FICO.

According to Lee, “The average credit utilization among the top 25% of high FICO scoring individuals is 7%, but you can still have an excellent score with a utilization higher than that by consistently paying your bills on time and applying for credit only when needed.”

Low utilization can help your score, but Lee highlights a potential issue if you strictly follow a 0% approach.

“In some cases, a low credit card utilization ratio will have a more positive impact on your FICO score than not using any of your available credit at all,” he explains. “Having a low utilization indicates you are actively using credit in a responsible manner.”

Credit utilization vs. credit limit: What's the difference?

Whenever you're issued a credit card or line of credit, it'll include a credit limit, or the maximum amount you can charge or borrow.

For instance, if you have a credit card with a $10,000 limit and a balance of $4,000, you could spend $6,000 more before hitting your credit limit. As you pay down your balance, your available credit will increase, but it won't exceed the set limit.

Your credit utilization compares your combined credit limits and account balances.

Using the example above, let's assume you have one credit card. With a $10,000 limit and a $4,000 balance, your credit utilization is at 40%, which is considered high.

If you opened another card with a $5,000 limit but maintained a $4,000 total balance, your approximate credit utilization ratio would decrease to about 27%.

How to lower your credit utilization ratio

If you have a high credit utilization ratio, you might see a dip in your credit score, but there are actions you can take to lower your ratio and improve your credit.

Pay down credit card balances

Since your credit utilization ratio is based on your balance and limits, a lower balance can improve it. Focus on paying down credit cards to ensure your utilization stays below 30%.

“FICO scores are dynamic — moving up or down as the underlying information in your credit report changes,” says Lee. “So, if your credit utilization is high, but you pay off your credit card balances in full and reduce your spending the following month, your FICO score typically improves as soon as your credit card balances are updated on your credit report.”

McClary offers similar insight: “Credit utilization can affect your credit score as soon as the credit card issuer reports your balance to the credit bureaus,” he says. “This typically happens once a month, on your statement closing date.”

To maintain a lower credit utilization ratio, reduce your debts before they hit your credit report. “If you charge a summer vacation, the balance will likely be reported within a month,” notes McClary. “To minimize the impact, pay down the balance before your statement closing date.”

Request a credit limit increase

Sometimes, you can ask your credit card issuer to increase your credit limit. A higher credit limit (without an increased balance) can decrease your credit utilization ratio.

In the earlier example, a $10,000 limit and a $4,000 balance yielded a 40% credit utilization ratio. If your credit card issuer granted your request and increased your limit to $14,000, your new ratio would be around 29%, which puts you in positive territory.

Use multiple credit cards responsibly

Your credit utilization ratio takes into account all your lines of credit. Having multiple credit cards can increase your combined credit limit. Responsibly using those cards and keeping balances low can lead to a lower credit utilization ratio. If you have four credit cards, each with a $5,000 limit, your combined credit limit is $20,000. Even if you carry a small balance on each card, you can maintain a low credit utilization by ensuring your combined balance never exceeds $6,000 (30% of your combined credit limit).

That said, Lee highlights that how you use each card is essential. “It can matter how your debt is spread across credit accounts: For example, the FICO score may consider credit card utilization both in terms of the relationship between your total credit card balances and total credit card limits, as well as in terms of the single highest utilization you have on any one credit card.”

As such, Lee suggests spreading your debt around to avoid a high balance on a single card.

Still, that doesn't mean you should rush to open more credit cards. “Don't open several new credit cards you don't need to increase your available credit: This approach could backfire and actually lower your credit scores by lowering your average account age,” warns Lee.

McClary agrees. While he says opening a new credit card can lower your overall utilization by increasing your credit limit, he cautions that it can be risky, especially if you have trouble maintaining responsible spending habits.

Common mistakes that hurt credit utilization

Maintaining a healthy credit ratio isn't only about practicing responsible behaviors. You also need to avoid activities that can jeopardize your utilization ratio. These include:

Maxing out credit cards

Maxing out a single card can spell trouble, even if you have a wallet full of cards in good standing.

“The most common mistake people make is focusing solely on the overall utilization rate without considering individual card utilization,” says McClary. “They might think that having a low overall utilization is sufficient, but maxing out a single card can still severely damage their credit score.”

He adds, “Maxing out one credit card will negatively impact your credit score, even if other cards have zero balances. This is because credit utilization is calculated both overall and per card.”

Instead of maxing out a single card, McClary recommends having a lower balance spread across multiple cards, which can lower your credit utilization ratio and help you improve your score.

Closing old accounts that improve credit limits

Closing cards you don't use or want is tempting, but you may want to think twice before doing so, unless it's part of a strategy to limit or control your credit card usage.

“Don't close unused credit cards as a short-term strategy to raise your scores,” says Lee.

“When you close a credit card, especially one with zero balance, you are reducing your available credit, which can increase your credit utilization ratio. If your credit utilization ratio climbs, your FICO score might dip in response.”

Say you have two credit cards, each with a $10,000 credit limit. While you have a $5,000 balance on one, you haven't touched the other in a year and want to close it.

However, with the account still open, your credit utilization ratio is 25% since your combined credit limit is $20,000. If you close one card, your credit limit drops to $10,000, and the utilization ratio increases to 50%.

Only making minimum payments on high balances

“A tried-and-true best practice to improve credit utilization is paying more than the minimum balance,” says McClary.

The higher your balance, the higher your credit utilization. Making minimum payments might help you avoid fees, but your credit utilization ratio will stay higher for longer.

Since credit card balances are often reported at the end of a statement period, making larger or multiple payments over the course of the month can prevent high balances from hitting your credit report, decreasing your utilization rate for that period.