What Is the Credit Utilization Ratio and How Does It Affect Your Credit?

If you’re trying to fix your credit score, it can feel like solving a crossword puzzle — without having any of the clues. Fortunately, there are only a few strategies you need to master to fix your credit score.

One of the most important? Your credit utilization ratio. This comprises a large part of your credit score. We'll explore how your ratio works, how to reduce it, and why it matters so much. 

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  • Your credit utilization ratio is the percentage of your available credit you're using.
  • To determine your credit utilization, divide your total balance by your total credit line. Then multiply by 100 to get the percentage.
  • The credit utilization ratio makes up a large part of your credit score. Lowering it may help raise your credit score.
  • You should aim to keep it below 30%.
  • It is one-way lenders determine how responsible you are with credit.

What is the credit utilization ratio?

A credit utilization ratio is a formula that calculates how much credit you’re currently using compared to how much credit you have available on revolving credit accounts. It affects 30% of your FICO Score, the most popular credit score used by lenders.

It is used by credit reporting agencies when determining your credit score. It’s regarded as an important metric because if you’re using a high percentage of your available credit limits, it indicates you’re unable to cover your expenses. A good ratio, generally below 30% indicates you're able to manage your budget without relying too heavily on available credit.

How to calculate your credit utilization ratio

Calculating your rate or percentage is fairly simple.

First, write down the current balance on your credit card. Then, find out what your total credit limit is for that account. This is different from your available credit limit.

Next, divide the current credit balance by the total credit limit. The answer will be a decimal that represents the percentage of your available credit being used.

For example, let’s say you have a $5,000 balance on all your credit cards and a $15,000 total credit limit. Following the above steps yields 0.33 (recurring) on a calculator. In this case, you have a 33% credit utilization ratio.

Your credit balance is determined by the balance you have when the statement period closes. This date varies depending on the card. You can find this date by logging onto your credit card account or calling the customer service hotline.

Man using calculator computing credit utilization ratio: Guide to what is credit utilization ratio and how does it affect your credit.

How does credit utilization affect my credit score?

So why does credit utilization matter? For better or worse, your ratio has a large effect on your credit scores. It makes up 30% of your total FICO Score and is the second biggest factor in FICO's credit scoring models. 

If you have a low credit utilization rate, then you will have an easier time achieving an excellent credit score. Similarly, a high credit utilization ratio will make it difficult to get a score in the high 700s or 800s.

Related: How to increase your credit score

Is overall or per card utilization more important?

There are two types of credit utilization ratios: the individual card utilization ratio and the total card utilization ratio for all your credit cards. 

While both of these ratios are important, it’s usually better to focus on your individual card credit utilization ratio. It’s possible to have a total card utilization ratio on all revolving credit accounts that is less than 30%, but have a single credit card with more than 30% credit utilization.

How to improve your credit utilization

The simplest way to fix or reduce your credit utilization ratio is to pay down your credit card balance. However, that’s often easier said than done.

First, determine what your credit utilization is for each of your credit cards. Next, focus on the card with the highest ratio. Work on paying that balance down until it’s below 30%. Then, move on to the card with the next highest ratio.

A quick way to lower your credit utilization percentage is by asking credit card issuers for higher credit limits. For example, let’s say you have a $6,000 balance on a card with a $10,000 credit limit. This means you have a 60% credit utilization percentage, which is much higher than it should be.

If you ask for a higher credit limit and get a $15,000 credit limit, then your new credit utilization percentage is 40%. While this is still above the 30% benchmark for a good ratio, it’s much better than what it was.

Keep in mind that when you ask for a higher credit limit, the card issuer may run a hard credit check, which can cause a slight decrease in your credit score. This will usually go away in a few months, especially if you work on reducing your credit utilization in the meantime.

Related: How to pay off credit card debt

FAQs

Is a 35% credit utilization good?

A 35% credit utilization ratio is higher than the typical recommended maximum threshold, which is 30%. If your credit utilization ratio is 35%, then you will likely see a negative impact on your credit score.

However, don’t let perfect be the enemy of good. A 35% credit utilization ratio is better than a 50% or 70% credit utilization ratio. As long as you keep paying down the balance and reduce how much of your available credit you're using, then it will improve — along with your credit scores. 

What happens if I use more than 30% of my credit limit? 

If your credit utilization ratio is above 30%, you will likely see a drop in your credit scores. 

While the 30% utilization threshold is the ideal maximum for everyone, if you want a perfect credit score, you should have a utilization percentage that is 10% or less. This can help you achieve excellent or even near-perfect credit scores.

Does a balance transfer affect my credit utilization ratio?

When you initiate a balance transfer, you can potentially lower your credit utilization ratio, which can improve your credit scores.

Here’s how it works. Let’s say you have 50% credit utilization on one of your cards. That will impact your credit score because it’s much higher than the maximum suggested ratio of 30%. If you transfer half of that balance to a new card, you can reduce your percentage on each of those credit cards. 

Remember, the individual credit utilization on each card matters just as much — or even more — than the total credit utilization percentage.

Also, when you transfer your balance to a card with 0% APR, you can speed up the debt repayment process, which can also dramatically improve your credit utilization percentage over time. That can also save you hundreds or even thousands of dollars on credit card interest, depending on your outstanding balances.

Paying down your credit cards with a debt consolidation loan can also improve your credit score, while potentially saving you money on interest. 

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.