Key takeaways
Your credit utilization ratio accounts for 30 percent of your FICO score and is calculated by dividing the total debt you have on your revolving credit accounts by your total credit limits you have on these accounts.
Experts suggest keeping credit utilization at less than 30 percent to maintain good credit, but those with excellent credit keep it below 10 percent.
Lower your credit utilization by paying off revolving debt, requesting a higher credit limit, performing a balance transfer or applying for a new credit card.
When you’re looking for ways to improve your credit score, addressing your credit utilization ratio is one of the best places to start. So, what is a credit utilization ratio? It’s a percentage representing the amount of credit you’re using compared to your revolving credit limits. A low credit utilization is associated with good to excellent credit scores and responsible credit use. A high credit utilization might mean you’re closer to maxing out your credit cards and can often result in a lower credit score.
Understanding how credit utilization impacts your credit score is an important part of managing your credit. Find out what credit utilization is, how to calculate it and how you can lower your utilization ratio.
What is a credit utilization ratio?
If you’re reviewing your credit report and see the term ‘credit utilization,’ you might be wondering what that even means and what it has to do with your credit score. Credit utilization is a credit scoring factor that makes up 30 percent of yourFICO credit scoreand is also considered “highly influential” to yourVantageScore.
It looks at how much you owe across all open revolving lines of credit (such as credit card accounts and home-equity lines of credit) and compares that to yourtotal credit limit. If you have more than one credit card, your credit utilization ratio generally refers to the amount of debt you are carrying on all your credit cards and is usually expressed as a percentage.
That said, it’s important to remember that credit utilization is measured in two ways — individually and collectively. Having 90 percent credit utilization on one of your cards won’t reflect well on your score, even if your overall credit utilization across all accounts is much lower. That’s why it’s always a good idea to know what your balances are on all your cards and work to keep everything as low as possible.
What is a good credit utilization ratio?
Most credit experts advise keeping your credit utilization below 30 percent to maintain a good credit score. This means if you have $10,000 in available credit, your outstanding balances should not exceed $3,000. It’s all right to occasionally make purchases that exceed 30 percent of your available credit, as long as you pay them off within yourgrace periodand avoid turning them into revolving balances or long-term debt.
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