What is Credit Card Utilization Ratio?

Sometimes called debt-to-credit ratio, credit card utilization rate is the ratio of the outstanding balance divided by the credit limit.

Why is utilization important?

Low credit card utilization gives you the flexibility to access more credit when you need it, such as an unexpected expense. It also shows you are in control of your finances and spending habits.

In the eyes of creditors, high credit card utilization indicates that you may be having trouble. Which is why utilization is such a big factor in your credit score. The more credit you use, the less financial flexibility you have in case something comes up — which can affect your ability to make payments. So, keep your utilization low so you have available credit in case you run into a financial emergency.

Is my credit card statement balance used to calculate my utilization ratio?

Most credit card companies report your balance to the credit bureaus at the time that they issue your monthly statement.  That means the utilization on your credit report is only updated once a month.  That’s actually great news: because if you make a payment on your credit card just before your next statement, your lower credit card utilization rate will be reported to the credit bureau.

How do credit card balances affect credit score?

Credit card balance is an important part of your credit score when it’s considered as a ratio with your credit limit, i.e. credit card utilization rate.  The balance by itself does not give a good indication of how much available credit you have or how you use the credit card.  Consider this, a $500 balance on a card with a $500 limit means that the account has no flexibility if the person experiences a financial disruption. That means the chance of falling behind on payments and defaulting is likely higher than someone who owes $500 on a card with a $5,000 limit. Thus, utilization is stressed as a key factor and not outstanding balance.

How do you calculate credit utilization ratio?

Something to keep in mind is that your credit card utilization is calculated both for each individual account and all your cards as a whole. Having a single credit card with high utilization can hurt your credit score even if your overall utilization is low.

Example:

Blue Credit Card has a balance of $400 and a credit limit of $500  => $400 / $500 => Utilization at 80%

Red Credit Card has a balance of $200 and a credit limit of $2,000 => $200 / $2000 => Utilization at 10%

Overall utilization is ($400 + $200)  /  ($500 + $2000) => Total Utilization at 24%

Chart comparing the credit utilization rate of different credit cards

How do I drop my credit utilization? The utilization rate on every account is important for your credit score, as well as the utilization rate for all credit card accounts. Credit Card accounts with very high utilization can have a negative impact on your score.

The best thing to do is to pay down your outstanding balances. If you’re looking for the best way to improve your credit score, pay down your highest utilization card.  While any little bit helps, you should see your score improve as your utilization drops in 10% increments.

In situations where you have a relatively low credit limit, even spending a little will cause your utilization rate to increase quickly. Here, you could request an increase in your credit limit or get another credit card (and use it responsibly). Either option will increase your total available credit, but you should know that getting a new card may temporarily decrease your credit score.  By raising your credit limit and keeping your spending low, you’ll decrease your utilization ratio. You should be careful though, as getting access to more credit gives you more opportunities to spend and use credit — which can negatively affect your credit score.

What is revolving credit, and is it different than credit cards?

Revolving credit is a form of credit that you to borrow against multiple times and typically does not have a fixed payment.  The most popular type of revolving credit is a credit card, but there are others as well, including a revolving line of credit and private label or retail credit cards.

How does overall utilization on revolving credit influence credit scores?

In short, it’s just like with credit cards.  The lower your utilization of revolving credit, the better your score.

Whether it’s credit cards or a line of credit, the exact influence of your overall utilization is impossible to say because there are many other factors that will influence your score as well, including: 

  • The number of accounts you have
  • The age of your accounts
  • The payment status on each account
  • If any of your accounts have high utilization or are currently over 100% utilization. 

For best credit score results, you should first bring all your accounts below a 100% utilization rate. After that, we have found that dropping utilization rate by 10% can result in 5 to 15 points of credit score improvement. Wahoo!

Did you know loan utilization matters too?

While it isn’t discussed very often, your loan utilization percentage can also factor into your credit score. For loans, the utilization ratio is the outstanding balance divided by the original loan amount.  As you make payments on your loan, the utilization rate goes down.  While the impact is not as important as with revolving credit, it does help your score as you bring down the utilization rate of the loan.