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. Here's how your ratio works, how to reduce it, and why it matters so much.
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What Is a Credit Utilization Ratio?
Your credit utilization ratio is a formula that calculates how much credit you’re currently using compared to how much credit you have available. It affects 30% of your FICO score, the most popular credit score used by lenders.
It’s 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% shows you're able to manage your budget without relying too heavily on credit.
If you're not sure what your credit score is, it's worth checking, either from the bureaus themselves (Equifax, Experian, or TransUnion) or through a free service like Credit Sesame or Credit Karma.
If you see a low credit score, one of the factors causing it could be a high utilization rate.
RELATED: What Is a Good Credit Score?
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:
- When you take 5,000/15,000, you get 0.33 (recurring).
- That means 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.
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 are important, it’s usually better to focus on your individual card credit utilization ratio.
That's because you might have several credit cards that, combined, have a utilization ratio less than 30%. But if one card is over that, it's not ideal for your score or budget, even if your total ratio is low.
RELATED: How To Increase Your Credit Score the Right Way
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:
- Determine what your credit utilization is for each of your credit cards.
- Focus on the card with the highest ratio.
- Work on paying that balance down until it’s below 30%.
- Move on to the card with the next highest ratio.
Another way to lower your credit utilization percentage is by asking credit card issuers for higher credit limits — but only if you're sure you won't be tempted by having a higher limit!
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.
But don't spend more even though you have more credit! Remember, as you increase how much you owe on the card, you'll also increase your utilization ratio, which will put you right back where you started.
Also, 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, but it's worth being aware of.
RELATED: Why It’s Hard to Get Out of Debt With Only Minimum Payments
FAQs
Is a 35% credit utilization good?
A 35% credit utilization ratio is higher than the recommended maximum of 30%. If your ratio is 35%, you may see a negative impact on your credit score.
However, don’t let perfect be the enemy of good. A 35% ratio is still better than 50% or 70%. As long as you keep paying down the balance and reduce how much of your available credit you're using, it will improve, along with your credit score.
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 score.
While 30% is good, if you want a perfect credit score, you should have a utilization percentage of 10% or less.
Does a balance transfer affect my credit utilization ratio?
A balance transfer can potentially lower your credit utilization ratio, which can improve your credit score.
Let’s say you have 50% credit utilization on one of your cards. 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.
TL;DR: Check Your Credit Utilization Ratio
Your credit utilization ratio—how much credit you're using versus what's available—makes up a large part of your credit score.
Keep each card below 30% utilization, and ideally closer to 10% if you can swing it. The best fix is simply paying down your balances, starting with whichever card has the highest percentage.
If paying down debt isn't realistic right now, you can also ask for higher credit limits to instantly improve your ratios. Just resist the urge to spend that extra credit, or you'll end up worse off than before.
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