What is a credit utilization ratio?

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Summary

• A credit utilization ratio is the percentage of your available credit that you're using, usually measured on credit cards and other revolving credit.

• To calculate it, divide your balance by your credit limit and multiply by 100.

• Experian points to 30% as a reference point, and that the highest scorers usually stay in the single digits.

• Utilization sits inside the amounts owed category, which is about 30% of a FICO® Score and about 20% of VantageScore.

• Credit card companies typically report balances once a month, so the number on your credit report may not match your balance today.

If you've looked into your credit score, you've probably seen the term credit utilization. It describes how much of your available credit you're using, and it's one of the factors that lenders can see on your credit report. It most often comes up with your credit card balances. This guide explains what a credit utilization ratio is, how it's calculated, and which ratios credit experts describe as good. If you're new to the topic, you can start with what credit is and why it matters.

What is a credit utilization ratio?

Experian defines the credit utilization rate as the percentage of available credit you're using on credit cards and other lines of credit. You'll also see it called a credit utilization ratio or credit card utilization. If you have a credit limit of $1,000 and a balance of $300, you're using 30% of your available credit.

Credit utilization applies to revolving credit, such as credit cards and personal lines of credit. Installment loans, like a mortgage, a car loan, or a personal loan, have fixed payments over a set period. They're different from revolving accounts, which let you borrow up to a limit, repay, and borrow again.

Why credit utilization matters to lenders

Lenders look at your credit history to judge your creditworthiness, which is how likely you are to repay what you borrow. myFICO says that using a lot of your available credit may suggest you're overextended, and lenders can read that as a higher risk of default. 

This is why utilization falls inside the amounts owed category, the second-largest part of a FICO® Score. Lower utilization generally signals less reliance on credit. Lenders use scores as one input when they decide whether to approve an application and what interest rates to offer.

How to calculate your credit utilization ratio

Experian explains that you calculate your ratio by dividing a balance by the credit limit and multiplying by 100. You can do this for one card or for all of your cards together. Here's an example with two cards:

• Card A has a $4,000 limit and a $1,000 balance. That's 25%.

• Card B has a $1,000 limit and a $400 balance. That's 40%.

• Together, the cards have a $5,000 limit and a $1,400 balance. The overall ratio is 28%, because $1,400 divided by $5,000 is 0.28.

Credit scoring systems can consider the rate on each account on its own as well as the total across all accounts, so both numbers can matter. To find your numbers, look at the balance and credit limit listed on each statement or in your online account.

What is a good credit utilization ratio?

There isn't one official cutoff. Experian says a rate below 30% is generally seen as acceptable, while rates under 10% tend to work best for maximizing a score. 

According to Experian, the point where utilization starts to have a more pronounced negative effect is around 30%, and that a good rate is a low rate, ideally in the single digits.

It may help to see how that fits with score ranges. FICO places a good credit score at 670 to 739, a very good score at 740 to 799, and an exceptional score at 800 to 850. Experian says people with the highest scores tend to have low utilization, but utilization is only one piece. Payment history, length of credit history, credit mix, and new credit all play a part too. 

Below are FICO's general credit score ranges:

• 300 to 579: poor

• 580 to 669: fair

• 670 to 739: good

• 740 to 799: very good

• 800 to 850: exceptional

Lenders sometimes use the word subprime for borrowers with lower scores, which Experian defines as a borrower whose credit doesn’t meet the threshold to qualify for a creditor's best rates and terms. Important to note is that each lender defines it a little differently.

How credit utilization affects your credit score

Different credit scoring models weigh utilization differently:

• FICO® Score: Amounts owed (which includes utilization) make up about 30% of the score. 

• VantageScore 4.0: Counts credit utilization as 20% of the score and looks at your utilization for up to two years prior.

Both the FICO score and VantageScore treat payment history as the biggest factor, so on-time payments and utilization work together. Late payments can hurt a score even when utilization is low.

Other factors play a role in your credit score as well. The length of credit history, credit mix, and new lines of credit all count towards your score. For instance, a hard inquiry, which happens when you apply for credit, can also affect your score, and the CFPB says lenders usually run one when you apply for a new card or loan. Lenders also look at elements that aren't part of a score, such as income and the loan terms they offer. The Fair Isaac Corporation, which created the FICO score, notes that its scores only use the data in your credit report.

When your balance gets reported

Credit card companies don't send updates to the credit bureaus every day. Each billing cycle ends with a statement, and Experian explains that issuers typically report around that time. 

The three credit bureaus are Equifax, Experian, and TransUnion. That means the balance on your credit report may differ from your balance today. Experian notes that your report lists the balance from the last time the company reported. Because of this, paying a card in full each month doesn't always mean a 0% ratio shows up on your report.

Common ways people may lower their utilization

Credit education sources describe a few common ways people lower their credit utilization ratio.

• Paying down balances. Experian says paying down high card balances is one way to improve a ratio.

• Requesting a higher credit limit. A larger limit means the same balance makes up a smaller share. Your credit card issuer may run a hard inquiry when you ask, so it's worth knowing that before you request an increase.

• Keeping older accounts in mind. The CFPB says closing credit card accounts may hurt your score if you're using a high percentage of your total credit limit, since closing a card removes its limit. You can read more about whether closing a card hurts your credit.

• Looking at other tools for building credit. Secured credit cards like the OnePay Credit Builder card are one option people look at when they're building credit. These cards often use a security deposit that sets the credit limit.

How to keep an eye on your credit

You can check your credit report for free. Equifax, Experian, and TransUnion offer free weekly reports at annualcreditreport.com. Reviewing your reports can help you spot unfamiliar accounts or signs of identity theft. Many credit card companies, banks, and apps also offer free credit score tracking, which can be one way to follow your financial health between statements. You can also read about ways to check your credit score.