Just a few points on your credit score can make the difference in being approved or denied credit. But multiple factors go into credit scoring, including your payment history, amounts owed, and credit mix.
Approximately 30% of your FICO credit score is based on the amount of debt you owe. Only payment history ranks higher, at 35%. Your overall amount of debt plays an important role in scoring, but FICO also takes a look at your revolving accounts to determine just how much of your allotted credit you’re using. The lower that ratio, the better. That’s what FICO calls your revolving utilization rate.
Credit 101: What is revolving utilization?
Revolving credit refers to any credit that automatically renews when balances are paid off. This mainly refers to credit cards, but it can also be impacted by a credit line issued by a bank or lender.
Utilization rate measures the difference between your credit card balance and the credit limit. Your current balance is listed on your statement, along with your credit limit. Occasionally, your credit card issuer might increase your limit after noticing you’re a reliable borrower.
How to Calculate Your Revolving Utilization
Determining your credit utilization ratio is fairly simple. You divide your balance by your credit limit. You’ll then multiply that by 100 to get your percentage. This can be expressed as a formula:
What you owe ÷ credit limit x 100 = credit utilization ratio.
If you have a credit card with a $2,000 balance, but your credit limit is $10,000, you’d have a 20% rate. $2,000 ÷ $10,000 × 100 = 20%.
You can also find calculators online that will make it easier to check your utilization across multiple credit cards. These tools can help you input changes to your balance on each card to see where your rate needs to be to boost your score.
What is a good revolving utilization rate?
Any look at revolving utilization has to consider what credit scoring models see as a good ratio. Generally speaking, the lower that ratio is, the better. A low balance with respect to the credit limit shows you’re avoiding overspending and managing your credit well.
But what’s considered a low score? Scoring models tend to prefer ratios under 30%. The lower, the better. But there are some factors to consider if you’re hoping to qualify for a mortgage, installment loans, or other forms of credit.
Per Card vs. Overall Credit Utilization
The challenging thing about gauging your credit utilization is that not all credit scoring models calculate those rates the same way. Some may take a look at credit card accounts individually, while others combine all credit accounts into one lump sum.
If the latter is the case, that means your total balances will be added together and divided by the total credit limit on all revolving accounts. They’ll then multiply that number by 100 to get the percentage.
That means if you have two credit cards with a $2,000 balance on only one, but the limit is $10,000 each, the formula will be $2,000 ÷ $20,000 × 100 for a total of 10%. In that sense, your debt-to-credit ratio can work in your favor.
Credit Card Reporting and Your Score
Timing comes into play, particularly if you’re cleaning up your credit report for an upcoming purchase. If you put some money toward a credit card to pay down the amount due, credit reports might not reflect that change immediately. There’s a reason for that.
Credit card issuers report activity to the credit bureaus once a month, typically at the end of each billing cycle. This means it could be a few weeks after you take action to improve your credit score before you see any change.
5 Ways to Improve Your Credit Utilization Rate
Improving credit scores can take time, so it’s important to start working on it well before you need to use it. Your credit profile is something you build over months and years, but there are some things you can do to boost your credit utilization so that your FICO score is as robust as it can be.
Reduce Your Credit Card Debt
Even lowering your credit card balances by a few hundred dollars can make a difference. High balances can count against you in a variety of ways. A lender may pull your credit report, for instance, and note the high balance on each of your cards.
Before getting started, calculate your overall credit utilization and find the magic number necessary to lower your rate below 30%. Then make a plan to pay a little extra toward your credit card debt each month by the due date until you reach it.
Request Higher Credit Limits
Increasing your credit card limit can be a great way to boost your ratio. The higher credit limit will look better when compared to your account balance. Pick one card at a time and contact your bank to ask for a boost to your available credit.
Set Up an Automatic Balance Alert
If you’re trying to boost your score, keeping an eye on your account is a good plan. Your credit card accounts should come a way to set up notifications. If it’s an option, set up alerts on your credit card balances to keep you motivated to stay on track.
Make Twice-Monthly Credit Card Payments
Keeping your balance low throughout the month can help ensure your ratio is low when your payments are reported. Make it a point to pay toward your balance more than once a month.
Consolidate Your Debt
Lenders pay close attention not only to your credit score, but your credit history. Consolidating your debt into one personal loan can help in two ways. One is that it will reduce your revolving debt, and another is that if you pay it on time, you can boost your score.
What is good revolving credit utilization?
Good utilization happens when credit scoring sees you as using a small percentage of your credit limit.
What does revolving utilization mean?
The credit industry defines revolving utilization as how you use a type of credit that renews with each payment. A great example of revolving accounts is a credit card, which lets you pay down the debt and start over with a refreshed line of credit.
What should I keep my revolving utilization under?
Although it can vary by credit bureau, it’s best to keep your credit utilization under 30%. This is calculated by looking at the amount you owe and the limit. The limit is typically set whenever you get a new card, but it can increase over time.
If you’re trying to boost your credit score, reducing your debt is always a great idea. Since part of your score is calculated based on your debt ratio, paying down your balance can help. On the flip side, that won’t be the only factor, so make sure you look at other lines of credit and debts that might impact your attractiveness to lenders.