Credit Utilization Ratio: Definition, Calculation, and How To Improve

What Is Credit Utilization Ratio?

The credit utilization ratio is the percentage of a borrower’s total available credit that is currently being used. The credit utilization ratio is a component used by credit reporting agencies in calculating a borrower’s credit score.

Lowering your credit utilization ratio can help you improve your credit score. If you are trying to improve your credit score, avoid closing a credit card. It is better for your credit utilization ratio to have a low ratio than a closed card.

Key Takeaways

  • Your credit utilization ratio will go up and down with payments and purchases.
  • Credit utilization is one factor in how credit bureaus calculate your credit score. 
  • A high ratio reflects poorly on your credit score.
  • You can improve your credit utilization ratio by reducing your debt and avoid closing old revolving credit accounts.

How Credit Utilization Ratio Works

The credit utilization ratio is typically focused primarily on a borrower’s revolving credit. It is a calculation that represents the total debt a borrower is utilizing compared to the full revolving credit that they have been approved for by credit issuers.

Your current debt-to-income ratio is a key metric that affects your credit score, which in turn affects your ability to get credit. This ratio factors in both revolving and non-revolving credit. Aim to keep the use of your revolving credit below 30% to maintain a higher credit score.

How to Calculate a Credit Utilization Ratio

To calculate your credit utilization ratio, you need to tally up all of your credit accounts. First, add up all the outstanding balances, then add up the credit limits. Take the total balances, divide them by the total credit limit, and then multiply by 100 to find your credit utilization ratio as a percentage amount.

Example of Credit Utilization Ratio

Below is an example of how a credit utilization ratio is calculated. Say a borrower has three credit cards with different revolving credit limits.

  • Card 1: Credit line $5,000, balance $1,000
  • Card 2: Credit line $10,000, balance $2,500
  • Card 3: Credit line $8,000, balance $4,000

The total revolving credit across all three cards is $5,000 + $10,000 + $8,000 = $23,000. The total credit used is $1,000 + $2,500 + $4,000 = $7,500. Therefore, the credit utilization ratio is $7,500 divided by $23,000, or 32.6%.

How Credit Utilization Impacts Borrowers

A borrower’s credit utilization ratio will vary over time as you make purchases and payments. The total outstanding balance due on a revolving credit account is reported to credit agencies at various times throughout the month.

The timeframe used by lenders for reporting credit balances to an agency can affect a borrower’s credit utilization levels. Therefore, borrowers seeking to decrease their credit utilization must have patience and expect that it may take two to three credit statement cycles for credit utilization levels to drop when debt is being paid down.

Special Considerations

Shifting credit card balances from an existing card to another will not change the credit utilization ratio, as it looks at the total amount of debt outstanding divided by your total credit card limits. However, transferring balances to lower interest credit cards could be beneficial in the long term since lower interest accumulation can keep balances down.

Closing a credit card account that you no longer use can hurt your credit score by reducing your total available credit. Thus, if you continue to charge the same amount or carry the same balance on your remaining accounts, your credit utilization ratio will increase, and your score may decrease.

Similarly, adding a new credit card will help to lower your credit utilization ratio. However, while new cards can benefit credit utilization, they may adversely affect your credit score through increased inquiries.

What Is a Good Credit Utilization Ratio?

According to Experian, one of the three major credit monitoring bureaus, a good credit utilization ratio should be kept under 30%. So, if you have $15,000 in credit, your balance shouldn't exceed $4,500.

How Much Does Credit Utilization Affect Your Credit Score?

Credit utilization ratios affect your credit score, as it represents 30% of how creditors rank your credit. If you have high credit utilization, your score can take a hit.

Is It Good to Have No Credit Utilization?

It is not necessarily good to have no credit utilization. It probably won't hurt your credit score, but it may not help it because creditors want to see that you can manage credit and pay off your credit card debt. For that reason, a low credit utilization may be better for your credit score than no credit utilization.

How Can I Improve My Credit Utilization?

If you want to improve your credit utilization, first pay down your debts to at least under 30% of your available credit. Other ways include utilizing more credit by asking for a higher limit or opening a new card, or you can keep a card with the balance fully paid open but not use it. However, the best way to improve your credit utilization is to pay off your debt on time.

The Bottom Line

Your credit utilization ratio is one of the most important factors used to determine your credit score. You can improve your credit utilization ratio by reducing the amount of debt you have. When you receive additional lines of credit, your credit utilization ratio will also improve as long as you do not use that credit.

Article Sources
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  1. MyFICO. "What's In My FICO Scores?"

  2. Experian. "What Is a Credit Utilization Ratio?"

  3. MyFICO. "What Should My Credit Utilization Ratio Be?"

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