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Credit utilization is an important part of your credit score, and monitoring it closely is key to a healthy credit score.
The credit utilization ratio, also known as the credit utilization rate, is the ratio of your current revolving credit balances divided by your revolving credit limit. To put it simply, if you have $50,000 in credit allocated, and you are using $3,000 of that credit, your utilization rate is 6%.
The higher your credit utilization ratio is, the more your credit score may be impacted, as your credit balances make up 30% of your credit score. Managing this is simple — be sure to balance your spending based on how much credit is given to you by your credit card issuer.
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Formula for Credit Utilization
The formal formula for calculating credit utilization rate is:
Current Balance — is the current balance on your Revolving Credit.
Credit Limit — is the total credit on your Revolving Credit.
Revolving Credit — is either an individual revolving credit instrument, like a credit card, or the total revolving credit, which is the sum of all of your credit cards and any other debt where you have a balance you can draw from as needed.
Steps to Calculating Your Credit Utilization Ratio
Calculating your credit utilization ratio is simple. First, you need to find out how much you are currently using of your credit issued to you. Then divide that by the total amount of credit given to you.
- Add the credit limits from each of your credit cards and any other line of credit (e.g., a home equity line of credit, or HELOC).
- Calculate your total revolving credit balance.
- Take both of those numbers, and divide the second one into the first to find your credit utilization ratio.
The lower your credit utilization ratio is, the better it will reflect in your credit score.
Example of credit utilization ratio
Here is an example of a consumer with an excellent credit utilization ratio:
Now here is a consumer that has a less than favorable credit utilization ratio:
A 50% credit utilization ratio will very likely have a negative impact on this person’s credit score. To bring this ratio down, it would be advantageous for this consumer to pay down their credit card balances as quickly as possible, or even temporarily adopt the practice of zero credit utilization. This is when consumers pay off their balance in full each month before the credit card issuer reports the balance, resulting in a 0% credit utilization.
Note, though, that maintaining a practice of zero credit utilization for the long term is not recommended since it will appear as if you’re not utilizing your credit at all. Credit issuers want to see that you can handle credit responsibly. The best practice is to simply keep your credit utilization low (typically under 30%).
Download or copy MoneyGeek's credit utilization calculator spreadsheet to calculate and understand your own credit utilization.
How Your Credit Utilization Impacts Your Credit Score
FICO indicates your credit utilization ratio makes up 30% of your entire credit score.
Managing credit utilization is a relatively fast way to improve or damage your credit. As you pay off your revolving credit card bills, you will see your credit utilization rate go down, and your credit score will likely go up. If left unchecked, it can impact your ability to get mortgages and auto loans.
When managing your credit, keep a general rule to use as little of it as possible, yet try to have as much credit awarded to you as possible. By doing this, you will continue to prove you can manage your credit responsibly.
Managing Your Credit Utilization Ratio
Managing this credit may seem overwhelming, but it is fairly simple. Keep these few points in mind when you are using your allocated credit:
- Pay off your balances in full, and aim to keep your utilization under 30% at all times.
- Don’t be shy to ask for more credit. Next time you speak to your credit card company, ask the customer service representative if you are eligible for a credit line increase. Issuers are more than happy to issue more credit, as long as you are a responsible customer, so don’t be afraid to ask.
- Balance transfer credit cards don't directly help. But if you are transferring to lower interest rates (APR), it can help you lower overall debt and utilization.
When Credit Utilization is Reported and Payment Timing
Unfortunately, credit bureaus do not have access to real-time reporting. If you make a large purchase and have a temporarily high credit card balance, your credit report may reflect a high credit utilization rate — even if you pay your balance off on time at the end of your billing cycle.
If your credit score doesn't reflect your most recent payment, don't fret. The recommended route to take is to pay your bills off in full to keep your credit utilization rate as low as possible. Credit card companies report this information every 30 days and at the end of your billing cycle. The score will correct itself as long as you don't maintain a high utilization rate over several months.
Other Questions You May Have About Credit Utilization
Credit utilization can be a tricky concept to grasp, and there are many questions among consumers. The MoneyGeek team researched some of the most frequently asked questions about credit utilization to find the answers consumers need.
There are a few steps you can take moving forward to perfect your credit score.
First, calculate your credit utilization ratio. If it is above 30%, try one of these few options to lower your ratio:
- Reduce your spending. It will take about a month or so for your ratio to correct, but it can significantly impact your credit score.
- Contact your credit card issuer and ask for a credit increase. It may require a credit score check. But in some cases, with a good history of spending and paying your statement off regularly, issuers will award a credit line increase over the phone.
- Apply for a new credit card. If you are approved for a new credit card, your credit utilization ratio will go down since new credit is being issued to you.
By doing any one, or all three, of these steps, you can continue to improve your credit utilization ratio and your overall credit score.
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The MoneyGeek Editorial team stays up to date by regularly monitoring financial trends and creating informational and actionable content for our readers. We strive to help readers better understand how credit cards work, as well as how to use them effectively as a financial tool and to stretch your dollar farther.
About Brett Holzhauer
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