Your credit score can open doors—or slam them shut. Whether you’re applying for a credit card, buying a home, or even renting an apartment, your score often plays a major role. One of the biggest factors affecting your credit score is your credit utilization ratio.
Keeping this number low is key to maintaining a healthy credit profile. In this article, we’ll cover what credit utilization is, why it matters, how to calculate it, and simple ways to improve it.
What Is credit utilization ratio?
Your credit utilization ratio shows how much of your available credit you’re using at any given time. It’s one of the key factors that credit scoring models look at when calculating your credit score.
To put it simply, this ratio compares your total credit card balances to your total credit limits. For example, if you have $1,000 charged on credit cards and your combined credit limits total $5,000, your utilization ratio is 20%.
The lower this percentage, the better it is for your credit score. A lower ratio tells lenders that you’re not relying too heavily on borrowed money and that you manage your credit responsibly.
Why Credit Utilization Matters
Credit utilization gives lenders a quick snapshot of how you manage credit. If you regularly use a large portion of your available credit, it can suggest that you’re stretched thin financially. Even if you always pay your bills on time, high balances can make lenders nervous and affect your chances of getting approved for new credit.
Keeping your balances low shows that you can borrow responsibly without relying too much on credit. It can also help you qualify for lower interest rates when you borrow.
How Credit Utilization Affects Your Credit Score
Your credit utilization ratio has a big impact on your credit score because it shows lenders how you manage your available credit. It makes up about 30% of your FICO score, which means even small changes can cause your score to go up or down.
When you use a large percentage of your available credit, it can signal to lenders that you’re overextended and may have trouble paying back what you owe. This can lower your score, even if you always pay on time. On the other hand, keeping your balances low shows that you use credit responsibly and aren’t relying too much on borrowed money.
High credit utilization can also make it harder to qualify for new loans or credit cards. Even if you have a good payment history, lenders might see a high ratio as a risk factor.
What’s a good credit utilization ratio?
Most financial experts recommend keeping your credit utilization ratio below 30%. This means you should try not to use more than 30% of your total available credit at any time. For example, if your combined credit limits add up to $10,000, you’d want to keep your total balances under $3,000.
If you can keep your ratio even lower—around 10%—that’s even better. Borrowers with the highest credit scores often use less than 10% of their available credit.
It’s also important to know that credit scoring models look at both your overall utilization ratio and the ratio on each individual account. So even if your total utilization is low, maxing out a single credit card can still hurt your credit score.
How to Calculate Your Credit Utilization
Calculating your credit utilization ratio is simple. Just divide your total credit card balances by your total credit limits, then multiply by 100 to get a percentage.
For example, if you owe $1,200 across all your credit cards and have $6,000 in total credit limits, your utilization ratio is 20% ($1,200 ÷ $6,000 = 0.20).
Remember, credit scoring models usually look at both your overall utilization and the utilization on each individual credit card.
Does credit utilization include loans or just credit cards?
Credit utilization only applies to revolving credit accounts, like credit cards and lines of credit. It does not include installment loans, such as mortgages, auto loans, or student loans.
That’s because revolving credit gives you a set credit limit that you can borrow against repeatedly, while installment loans have fixed payments and terms. Even if you owe money on a car loan or mortgage, it won’t factor into your credit utilization ratio.
Note: Some lenders and credit scoring models also call this your revolving utilization ratio. It’s just another name for the same thing—how much of your available revolving credit you’re using.
5 Simple Ways to Lower Your Credit Utilization
Lowering your credit utilization can give your credit score a healthy boost. Here are five simple ways to do it:
- Pay Down Balances – The fastest way to lower your utilization is to pay off as much credit card debt as possible. Focus on cards with the highest balances first.
- Request a Credit Limit Increase – Call your credit card issuer and ask for a higher limit. As long as your spending stays the same, this lowers your credit utilization ratio.
- Spread Out Your Spending – Instead of charging most expenses to one card, spread purchases across multiple cards to keep individual credit utilization ratios low.
- Make Early or Multiple Payments – Pay your balance before the billing cycle ends or make multiple payments each month. This keeps reported balances lower.
- Avoid Closing Old Accounts – Even if you pay off a card, keeping the account open maintains your total available credit and helps your credit utilization ratio.
How fast can lowering your credit utilization improve your credit score?
Lowering your credit utilization can improve your credit score surprisingly quickly. In most cases, once your lower balances are reported to the credit bureaus, you could see a change within one to two billing cycles.
If you’re applying for a loan or new credit soon, lowering your utilization now could help you qualify for better terms in just a month or two.
Final Thoughts
Your credit utilization ratio is one of the biggest factors affecting your credit score, but it’s also one of the easiest to improve. By paying down balances, keeping old accounts open, and managing your spending, you can lower your credit utilization and give your credit score a boost.
Even small changes can make a big difference over time. Stay consistent, and you’ll put yourself in a stronger financial position for future borrowing.
