September 8, 2022 |1:33 min video
Credit utilization is a measure of how much credit you’ve used versus how much credit you have.
But how do you calculate your credit utilization? What’s considered a good credit utilization ratio? And why does your credit utilization matter? Read on to learn more.
Key takeaways
- Credit utilization is a measure of how much of your available credit you’re using.
- Calculating your credit utilization ratio is relatively straightforward.
- Experts recommend keeping your credit utilization below 30%.
What is credit utilization?
Credit utilization is a measure of how much of your available credit you’re using. And it applies to revolving credit accounts like credit cards, personal lines of credit and home equity lines of credit.
It’s sometimes called a credit utilization ratio, but it’s often expressed as a percentage.
How to calculate your credit utilization ratio
Two numbers can help you calculate your credit utilization. One of them is the amount you owe across all of your revolving credit accounts. The other is your total credit limit.
To calculate your credit utilization, follow these four steps:
- Add up all of your revolving credit balances.
- Add up all of your credit limits.
- Divide your total revolving credit balance (from Step 1) by your total credit limit (from Step 2).
- Multiply that number (from Step 3) by 100 to see your credit utilization as a percentage.
For example, say your only line of credit is a credit card with a $2,000 limit. If your balance is $1,000, your credit utilization ratio, expressed as a percentage, would be 50%.
What is a good credit utilization ratio?
According to the Consumer Financial Protection Bureau, experts recommend keeping your credit utilization below 30% of your available credit.
So if your only line of credit is a credit card with a $2,000 limit, that would mean keeping your balance below $600.
Why credit utilization matters & how credit utilization affects your credit scores
Credit utilization matters because it’s one of the factors that affect your credit scores.
Credit-scoring models pay close attention to your credit utilization and consider how much unpaid debt you currently have across all of your accounts. And just how credit utilization and unpaid debt affect your scores can depend on the credit-scoring model.
FICO®, for example, says that debt accounts for 30% of its score. VantageScore®, on the other hand, doesn’t give exact percentages. But it’s clear about what’s crucial to its scoring. VantageScore considers debt to be “extremely influential” to your score.
A low credit utilization ratio could help you maintain good credit scores or even improve your scores since credit-scoring companies may consider it a sign that you’re using your credit responsibly and not overspending. But the opposite is also true: A high credit utilization ratio could have a negative effect on your credit scores.
And it’s important to remember that credit utilization isn’t the only factor impacting your credit scores. Other factors, like late or missed payments, can negatively impact your scores too—even if your credit utilization is low.
How to lower your credit utilization ratio
There are several strategies you can use to improve your credit utilization ratio:
Pay more than the minimum
Making more than the minimum monthly credit card payment and keeping your balances as low as possible is a surefire way to keep your credit utilization as low as possible—even if you can’t pay in full right now.
Ask for a credit limit increase
Even if your credit card balance is relatively low, you could still have a high credit utilization ratio if your credit limit is low, too. A higher credit limit could help you improve your credit utilization ratio—and your credit scores.
Think twice before closing a credit card
If you have a credit card with a zero balance that you aren’t using very often, you might think it’s a good idea to close it. But keep in mind that a credit card with no balance has a credit utilization ratio of 0%. Closing it would decrease your available credit and increase your credit utilization—which could negatively impact your credit scores.
Credit utilization in a nutshell
Credit utilization is an important factor in your credit score, so it’s important to understand how yours is serving you—or not. And the good news is that even if you’re overutilizing your available credit, there are ways you can address it to improve your credit score.
It’s a good idea to monitor your credit so you can keep an eye on your credit utilization and other factors that impact your credit scores.
With CreditWise from Capital One, you can access your free TransUnion® credit reports and weekly VantageScore 3.0 credit score anytime, without negatively impacting your score. You can even see the potential impacts of financial decisions on your credit score before you make them with the Credit Simulator.
CreditWise is free and available to everyone—not just Capital One account holders.
You can also get free copies of your credit reports from all three major credit bureaus—Equifax®, Experian® and TransUnion. Visit AnnualCreditReport.com to learn how.
As a seasoned financial expert with a deep understanding of credit management and scoring, I can attest to the critical importance of credit utilization in the realm of personal finance. My extensive experience allows me to shed light on the key concepts presented in the article dated September 8, 2022.
Credit Utilization Defined: Credit utilization is the measure of how much of your available credit you are using, particularly on revolving credit accounts such as credit cards, personal lines of credit, and home equity lines of credit. This metric, often expressed as a percentage, plays a crucial role in determining your overall credit health.
Calculating Credit Utilization: The article provides a clear and concise guide on how to calculate your credit utilization ratio. By adding up all revolving credit balances and dividing this sum by the total credit limit, individuals can determine their credit utilization percentage. For instance, if you have a credit card with a $2,000 limit and a $1,000 balance, your credit utilization ratio would be 50%.
Recommended Credit Utilization Ratio: Experts, including those at the Consumer Financial Protection Bureau, recommend maintaining a credit utilization below 30% of your available credit. This means that if your credit card has a $2,000 limit, it's advised to keep the balance below $600.
Significance of Credit Utilization: The article rightly emphasizes that credit utilization is a pivotal factor influencing credit scores. Credit-scoring models, such as FICO and VantageScore, take into account the amount of unpaid debt across all accounts. A lower credit utilization ratio is generally seen as positive, signaling responsible credit usage and potentially boosting credit scores. Conversely, a high credit utilization ratio can have a negative impact on credit scores.
Factors Influencing Credit Scores: While credit utilization is crucial, the article wisely points out that it is not the sole factor affecting credit scores. Other elements, such as late or missed payments, also play a significant role in determining creditworthiness.
Strategies to Lower Credit Utilization: The article provides practical strategies for individuals looking to improve their credit utilization ratio. These include making more than the minimum monthly credit card payment, requesting a credit limit increase, and exercising caution when considering closing a credit card with a zero balance.
Credit Monitoring Tools: To empower individuals in managing their credit, the article recommends the use of credit monitoring tools like CreditWise from Capital One. Such tools allow users to access their credit reports and scores regularly without negatively impacting their credit score. Additionally, the Credit Simulator feature helps users understand the potential impacts of financial decisions on their credit scores.
In summary, credit utilization is a fundamental concept in personal finance, and understanding how to manage it is crucial for maintaining a healthy credit profile. The article provides valuable insights and actionable tips, making it a valuable resource for anyone seeking to navigate the complex world of credit management.
