What is credit utilization? (and how to improve it)
Your credit utilization rate measures the balances of your revolving accounts against your credit limits. Naturally, your ratio can influence your credit scores. A low utilization rate could improve your credit scores while a high utilization rate may hurt them.
For that reason, it’s worth understanding exactly how credit utilization rates work and how they impact your credit. While the math is straight forward—you only need to know addition and division—it’s not always clear which numbers to use.
How credit utilization ratio works
Credit utilization refers to the percentage of your total available revolving credit, such as credit cards and personal lines of credit. The balance on installment loans, including personal loans, aren’t part of credit utilization rate calculations, though they can impact your credit score.
You actually have two utilization rates: Individual account utilization and your overall utilization. To determine your individual utilization rate, credit scoring models like FICO divide the reported revolving balance by the credit limit on each card or line of credit.[1] Your overall credit utilization rate is the comparison of all applicable revolving balances and the limits.
Both your overall credit utilization rate and the utilization rate of individual accounts can be important to your credit score.
How does credit utilization affect your credit score?
Credit utilization rates can be a major factor in your credit score. However, the specific impact will depend on the type of credit scoring model and your overall credit profile.
FICO, for example, lists revolving utilization as a subcomponent of the “amount owed” portion of its scoring formula, which can account for 30% of your FICO Score.
A low utilization rate—both overall and on individual accounts—is generally better for your score.
Lowering your utilization rate can be one of the fastest ways to improve your credit score because most scoring models only consider your utilization rate as it is reported. Meaning, you may see a quick credit score boost if you’re able to pay off a high utilization rate at once.
Why credit utilization is important for lenders
Lenders use you credit score as a benchmark to determine if you qualify, among other things, for a loan, as well as its rates and terms. Because your credit utilization rate can be a major scoring factor, it could have a direct impact on the lender’s decision.
If you have high revolving credit limits and low balances, creditors take that as a sign that you know how to use credit wisely. If you are borrowing heavily against all your credit cards and revolving lines of credit, that can be a sign you’re not as financially responsible as you could be—or are under financial strain.
How to calculate your credit utilization
You can calculate your credit utilization rate by dividing the amount of revolving debt you owe by the amount of credit available.
For example, suppose you have a credit card and a line of credit, each with a limit of $5,000, for a total credit limit of $10,000. You owe $1,000 on the line of credit and $2,000 on the credit card, for a total of $3,000 owed. Given this, your credit utilization ratio is 30%.
There are several key points to remember when calculating utilization rates:
Many credit card issuers report balances monthly, around the end of each statement period or billing cycle.
The bill for the statement period may be due around three weeks later.
Credit scoring models only calculate the balances reported on your credit reports at the time.
Typically, credit card companies will report your balances to the credit bureaus around the end of each billing cycle.[2]
If the creditor reports to credit bureaus before you pay off the credit balance in full each month, you could still have a high credit utilization rate.
To calculate the most accurate utilization rate, review your credit report rather than your current credit card balance. Some credit reports may also include your credit utilization ratio, saving you the math.
5 ways to improve your credit card utilization
In the end, there are only two numbers that matter—the balance and the credit limit—but there are ways to decrease your credit utilization rate and potentially boost your credit scores.
1. Ask for a credit limit increase.
As long as your balance doesn’t increase as well, a higher credit limit can lower your utilization rate and make it easier to maintain a low rate. You can ask card issuers for a credit limit increase. However, the request may lead to a hard credit inquiry, which might cause a temporary dip to your credit score.
Also, check the annual income amount you reported to the credit card company, which you can typically find in your online account. If your income has risen, updating the amount may help you get approved for a higher credit limit or lead to a credit limit increase initiated by the card issuer.
2. Pay down credit card balances early.
Lowering your credit card’s balance before issuers report it to the bureaus could also lead to a lower utilization rate. While the reporting often occurs around the end of each statement period, you could call your card issuer to confirm the exact timing.
3. Open a new credit card.
Opening a new revolving credit account, such as a credit card, can increase your total available credit. However, keep in mind that a new card may carry an annual fee and could increase the temptation to spend, racking up debt and increasing—rather than helping—your utilization rate.
4. Keep your credit cards open.
If you have a credit card you’re considering closing, you may want to keep it open to maintain your available credit limit to potentially have a lower utilization rate.
You could use the card for a small monthly bill and turn on autopay to ensure on-time payments and avoid account closure due to inactivity. Or, set a calendar reminder to use the card every few months (and another one to pay it down).
If there’s a specific reason you don’t want the card due to its annual fee or concerns about overspending, closing it may be a better option. Learn more about closing a credit card account.
5. Become an authorized user on another person's card.
Credit card issuers may report accounts to the credit bureaus under both the primary and authorized users’ names. As an authorized user, you could benefit from having the additional available credit limit.
Keep in mind, as an authorized user, you’re also giving up some control. For instance, if the primary cardholder generates a high utilization rate, it could show up on your credit report as well. If they fail to make on time payments, your credit scores could also be impacted.
How personal loans help you lower credit utilization ratios
There are two ways a personal loan might lower your credit utilization rate.
The first is if you use a personal loan rather than a credit card for a major purchase. Since personal loans are installment accounts, the balance and initial loan amount aren’t part of utilization calculations.
You can also use a personal loan to consolidate credit card debt. In other words, you could take out a loan and use the money to pay down your debt. By eliminating your credit card balances and leaving the cards open, you could significantly lower your utilization rate.
By using a personal loan to pay down credit card debt, you will typically have a fixed interest rate, single monthly payment, and know exactly when the loan will be paid off. You can pre-qualify for a debt consolidation loan and check your rate with LendingClub Bank without impacting your credit score.
Manage your credit utilization responsibly
Tracking your credit card balances, credit limits, and statement period end dates can be prudent activities from a personal finance perspective. The most active way to manage your utilization rate is to make payments before issuers report your balances to the credit bureaus.
It’s generally better to avoid using credit cards for big purchases if cash is available to pay off your entire statement balance. This helps prevent high-interest credit card debt.
Credit utilization FAQs
Still have questions? Some of these commonly asked questions may provide the answer.
When is credit utilization calculated?
Credit utilization is calculated each month when credit card issuers report your balance to credit bureaus. Changes in your credit report, such as a new reported balance on a credit card, can lead to a different utilization rate.
Does credit utilization matter if you pay in full?
Yes, it still matters. Even if you pay your credit card bill in full, you could have a high utilization rate that may hurt your credit scores. Credit card balances are often reported weeks before the bill’s due date, and the reported balance is what impacts your utilization rate.
How does credit utilization affect your credit score?
Credit utilization rates can have a major impact on your credit scores. The specific amount of points will depend on the scoring model and the other information in your credit report. But if you have a high utilization rate, lowering it may be a way to increase your credit scores.
What is a good credit utilization ratio?
There’s no specific point where a utilization rate goes from good to bad. Keeping your overall utilization rate below 30% can be a helpful rule of thumb[3]—but the lower, the better.
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