Your credit utilization ratio, also known as your credit utilization rate, is an important factor in determining your credit scores. This ratio shows lenders what percentage of your total available credit you are using at any given time. Generally, experts recommend keeping your credit utilization rate below 30%, but lower is usually better. In this article, I’ll explain what an ideal credit utilization ratio is and how you can achieve it.
What is Credit Utilization?
Your credit utilization ratio compares the balances on all of your credit cards and revolving credit accounts to the total credit limits on those accounts. For example, if you have:
- Credit Card A with a $5,000 limit and $1,500 balance
- Credit Card B with a $10,000 limit and $2,000 balance
- Total credit limits of $15,000
- Total balances of $3,500
Your credit utilization rate would be $3500/$15000 = 23%.
Credit utilization gives lenders an idea of how well you are managing your available credit. Maxing out your cards or having a high ratio can signal that you are overextended and at higher risk of missing payments. On the other hand, a very low utilization rate can indicate that you aren’t using credit at all That’s why it’s important to find the “sweet spot” for ideal credit utilization
What is Considered a Good Utilization Ratio?
Experts generally recommend keeping your credit utilization ratio below 30%. However, the ideal ratio is often lower than that. Here are some credit utilization guidelines to follow:
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Below 10% This is considered excellent credit utilization Keeping your ratio in the single digits shows lenders you are using credit responsibly
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10-29%: This range is considered good. Credit scores may start to be impacted as you approach 30%.
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30%: Most experts say not to exceed 30%, although credit score damage may occur before this point.
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Over 50%: Your credit scores will likely take a significant hit if your ratio is this high. It signals you are overly reliant on credit cards.
So in most cases, the ideal credit utilization ratio is 10% or lower. But you don’t need to have a utilization ratio of 0% – some credit usage shows lenders you can manage credit responsibly.
How Credit Utilization Impacts Credit Scores
Credit utilization is typically the second biggest factor affecting your credit scores after payment history. Here is how different utilization ratios impact FICO credit scores:
| Utilization Ratio | Credit Score Impact |
|---|---|
| 0% | – 10 points |
| 1-9% | + 10-20 points |
| 10-29% | 0 points |
| 30-49% | – 10-30 points |
| 50-74% | – 30-50 points |
| 75-89% | – 50-75 points |
| 90-100% | – 75-105 points |
As you can see, the biggest credit score damage occurs once your ratio exceeds 30%. Even relatively small increases in utilization can lower your scores once you pass that threshold.
However, the impact also depends on your specific credit situation. For example, someone with excellent credit and positive credit history may not see as big of a score drop with a higher utilization ratio. Still, it’s best practice to keep your ratio low across the board.
Tips to Improve Your Credit Utilization Ratio
Here are some tips to lower your credit utilization rate and achieve that ideal ratio of 10% or less:
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Pay down balances: Focus on paying down your credit card and revolving debt. This will directly reduce the numerator in the ratio calculation. Prioritize paying down cards that are closest to their limit.
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Increase credit limits: Call your credit card companies and request an increase to your credit limit. This will grow the denominator and lower your utilization. Be sure to not increase spending with the higher limit.
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Open a new card: Applying for a new card can increase your total available credit and lower your overall utilization ratio. Only do this if you can manage the new account responsibly.
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Don’t close old cards: Closing credit cards actually reduces your total credit limit and can increase your ratio. Leave old accounts open even if not in use.
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Ask lenders to lower reported limits: Some lenders will report a lower “credit limit” to the credit bureaus without impacting your actual available credit. This underreporting artificially lowers your utilization.
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Make payments before statement date: Your statement balance is typically reported to the credit bureaus. Pay down balances before your statement cuts to show a lower amount.
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Track your utilization: Monitor your credit scores and utilization ratio regularly so you can adjust your spending if it creeps up. Many credit cards and personal finance apps make this easy.
With some focus and discipline, you can keep your credit utilization rate in the ideal range of 10% or lower. Doing so will help maximize your credit scores over time. Be sure to also practice good credit habits like paying all bills on time and keeping credit accounts open. Healthy credit utilization is just one piece of building excellent overall credit.
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Its also important to understand that credit card companies generally report your account balance around the end of your billing period. As a result, you could have a high utilization ratio even if you pay your bill in full, because the bill usually isnt due until around 21 to 25 days after you receive it.
If you frequently use your credit card to earn rewards or for the purchase protections it offers, you could pay down your balance during the billing period instead of waiting until just before the due date. Your card company will then report the lower current balance to the credit bureaus, which can lead to a lower utilization ratio and better scores.
Request a Credit Limit Increase
You can ask your card issuer to increase your credit limit. Card issuers dont have to say yes, and likely wont if you just opened your card or havent managed your account responsibly. But its worth asking, particularly if you havent missed any payments, usually pay more than the minimum due and wont take advantage of the increase by running up your balance. Also, update your income information whenever it rises: Card issuers may proactively raise your credit limit as your income increases, or may be more likely to say yes if you request a credit limit increase.
What is Credit Utilization & How Does It Affect Credit Score? | Capital One
FAQ
Is 20% credit utilization okay?
A general rule of thumb is to keep your credit utilization ratio below 30%. And if you really want to be an overachiever, aim for 10%. According to Experian, people who keep their credit utilization under 10% for each of their cards also tend to have exceptional credit scores (a FICO® Score☉ of 800 or higher).
What is the 2/3/4 rule for credit cards?
Does 0% utilization hurt credit score?
Yep, having 0% utilization can sometimes cause a small score drop because credit scoring models like to see some activity. It’s weird, but they prefer you to use credit rather than have a $0 balance reported.
What is the 15 3 rule on credit cards?
What is a good credit utilization rate?
Lenders typically look for a credit utilization rate below 30% — and aiming for 10% or less is even better. When you use only a small slice of your available credit, that lower credit utilization rate shows you’re not overly reliant on borrowed money and that you manage your finances wisely.
What is an ideal credit utilization ratio?
An ideal credit utilization ratio is a crucial strategy to increase credit scores because it directly influences one of the most critical components of credit score calculation. Financial experts increasingly advocate for maintaining credit usage well below the traditional 30% threshold to achieve an excellent credit score.
What is the best revolving credit utilization ratio?
A lower credit utilization ratio is better for your credit scores, but a little utilization is better than none at all. As a result, the best revolving credit utilization ratio may be 1%. However, you don’t need a 1% utilization ratio to have an exceptional credit score. Keeping your utilization in the low single digits could be good enough.
What is a good credit card utilization ratio?
Generally, keeping it below 10% (and consistently paying bills on time) can help you build and maintain a good FICO® Score. That said, you want to be careful about having a utilization ratio of 0%. This is because it signifies that you’re not using your credit cards at all, giving FICO less information about how you manage your money.
What is your credit utilization ratio?
Your credit utilization ratio is calculated by dividing your total credit balances by your total credit limits. For example, if you have a $5,000 credit limit and your total balances are $500, then your credit utilization ratio is 10% ($500 / $5,000). This metric only considers credit card and other revolving debts, not installment loans.
What is credit utilization & why is it important?
Credit utilization, also known as your debt-to-credit ratio, is the ratio of your overall outstanding balance to your overall credit card limit. This factor accounts for up to 30% of your FICO score, making it important to understand and manage. While less known and understood than other factors like on-time bill payments, credit utilization plays a significant role in your credit score.