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What is a Credit Utilization Rate?

Your credit utilization rate, sometimes called your credit utilization ratio, is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. In other words, it’s how much you currently owe divided by your credit limit. It is generally expressed as a percent. For example, if you have a total of $10,000 in credit available on two credit cards, and a balance of $5,000 on one, your credit utilization rate is 50% — you’re using half of the total credit you have available. You can calculate an overall credit utilization rate as well as a rate for each of your credit accounts (called your per-card ratio).

Credit scoring models often consider your credit utilization rate when calculating a credit score for you. They can impact up to 30% of a credit score (which makes them among the more influential factors), depending on the scoring model being used.

A low credit utilization rate shows you’re using less of your available credit. Credit scoring models generally interpret this as an indication you’re doing a good job managing credit by not overspending, and keeping your spending in check can help you reach higher credit scores. Having higher credit scores can make it easier to secure additional credit, such as auto loans, mortgages and credit cards with favorable terms, when you need it.

Revolving Credit

Credit utilization rates are based solely on revolving credit — essentially, your credit cards and lines of credit. The rates do not include installment loans like your mortgage or an auto loan. Those factor into your credit in a different way.

“Revolving credit” is called that because it doesn’t have a pre-determined end date; the amount you owe carries over (revolves) from month to month. Every month, you can borrow against your credit limit, reducing the amount of credit you have available, repay all or some of it, and borrow against the available amount again.

As long as your account is in good standing and you haven’t reached your credit limit, you’ll be able to continue borrowing with your credit card or line of credit. Every month, you’ll pay interest on the amount of credit you’re using. If you pay your credit card balances in full every month, you won’t accrue any interest charges and your credit utilization rate will be low.

Installment loans like mortgages and auto loans factor into a different rate — your debt-to-income ratio. Mortgage companies and vehicle lenders often use your debt-to-income ratio to understand how much of your total annual income goes toward paying off installment debt. While many lenders use your debt-to-income ratio to make decisions and may consider it to be a valuable indicator, it’s not used to calculate your credit scores.

Per-card vs. Total Utilization

While your credit utilization rate is generally a comparison of total credit used to total credit available, the amount of credit you’re using on individual cards is also important. Your per-card credit utilization rate is calculated in the same basic way as your overall utilization rate, except it compares the balance of an individual credit card to available credit on the same card.

Let’s go back to our earlier example of two credit cards with a total credit limit of $10,000, of which, you’re using $5,000. Your total credit utilization rate is 50 percent. If each card has a credit limit of $5,000 and you owe $3,000 on one and $2,000 on the other, your per-card utilization rates would be 60% and 40% percent, respectively.

What is a Good Credit Utilization Rate?

In a FICO® Score or score by VantageScore, it is commonly recommended to keep your total credit utilization rate below 30%. For example, if your total credit limit is $10,000, your total revolving balance shouldn’t exceed $3,000. Generally, a low credit utilization ratio is considered an indicator that you’re doing a good job of managing your credit responsibilities because you’re far from overspending. A higher rate, however, could be a flag to potential lenders or creditors that you’re having trouble managing your finances.

Balance Reporting and Credit Utilization

Every month when you pay your credit card bill, you’re affecting your credit utilization rate. If you make a substantial payment that you know will bring your rate under 30%, you may be frustrated if you don’t see your credit score improve immediately.

It’s important to understand that your credit utilization rate — and by default your credit scores — can be affected by the timing of when a credit card company updates your balance information with the credit reporting agencies. Typically, credit card companies update this information every 30 days at the end of your billing cycle. It’s possible that you could make a payment on one of your credit cards but not see the impact on your credit scores for a few weeks, when the credit card company updates your balance information with the credit reporting agencies.

Should You Open Credit Cards to Improve Your Credit Utilization Rate?

You can manage your credit utilization ratio in several ways, including:

  • Paying credit card balances in full every month. Remember that even if you’re not able to get completely ‘back to zero’ each month, keeping your balances as low as possible is still helping you move the right direction and avoid racking up excessive debt.
  • Keeping open credit accounts that have zero balances, even if you don’t intend to use them.
  • Requesting a credit limit increase from a credit card issuer.
  • Opening new credit accounts.

This last option, however, has the potential to negatively affect your score in the short term. Credit scoring models also consider the number of times new creditors — such as a new credit card company — have looked at your credit report within a certain time frame. Too many inquiries in a short period of time can influence your credit scores. In addition, having too many credit cards compared to your overall credit mix may also be a risk factor and could negatively impact your credit scores. You know yourself best, and if having open cards with high limits could prove too tempting for you to overspend, carefully consider the right number of accounts for you based on your personal strengths and financial abilities.

How Closing a Credit Card Can Affect Your Credit Utilization Rate

Just as opening new cards can have a short-term negative affect, so can closing existing accounts. When you close a credit card account, you’re reducing your total credit limit. If you owe nothing on any credit cards, your credit utilization rate is zero, and lowering your total available credit won’t change that rate. However, depending on the age of the credit card account that is closed, your length of credit history could be negatively impacted and affect your score.

If you do carry a balance and reduce your total available credit by closing a zero-balance account, you could affect your utilization rate. For example, say you have $10,000 in available credit on two cards, with a credit limit of $5,000 on each, and owe $5,000 on one. Your credit utilization rate is currently 50%. You decide to close the zero-balance card, which lowers your total available credit to $5,000. Now your credit utilization rate is 100%!

Your credit utilization rate is just one of many factors that can affect your credit scores. It’s important to understand how it works, and how you can manage credit utilization to make it work for you. To see how your credit history may look to lenders and others, you can check your credit report from Experian.

FICO is a registered trademark of the Fair Isaac Corporation.

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