Your credit utilization ratio is the percentage of your total available credit that you’re currently using. A good ratio is considered anything below 30%. If it’s high, it tells lenders that you’re using the majority of your available credit. This negatively affects your credit score as it is one of the largest factors in how your credit score is calculated.
To calculate your credit utilization ratio, simply add up your total revolving debt and your total credit limit, then divide your debt by your credit limit and multiply that number by 100.
What Is a Credit Utilization Ratio?
Your credit utilization is the percentage of your total available credit that is currently being used on revolving credit accounts like credit cards and home-equity lines of credit. In other words, credit utilization rates are based only on revolving credit, such as your credit cards and any open lines of credit. It do not include installment loans, such as auto loans, personal loans or a mortgage.
For instance, if your credit utilization ratio is 20 percent, it means you’re using 20 percent of the credit that you have available to you. So, if you have a credit card with a $8,000 limit and a credit utilization ratio of 20 percent, it means you have a balance of $1,600 as 20% of $8,000 is $1,600.
Keep in mind that your credit utilization ratio takes into account the total amount of debt you have across all of your credit cards if you have multiple ones.
What’s a Good Credit Utilization Ratio?
A good credit utilization ratio is anything below 30%. To achieve good or excellent credit, it is recommended that you maintain a low credit utilization ratio. Most credit experts suggest keeping it below 30% as it helps in maintaining a good credit score.
How Your Credit Utilization Ratio Affects Your Credit Score?
It is recommended to maintain a high amount of available credit and keep debts as low as possible because credit utilization accounts for 30% of your credit score. Having high balances on your credit cards can increase your credit utilization ratio and result in a lower credit score.
Your credit score under the FICO scoring model is influenced by five factors, each of which accounts for a certain percentage of your total score.
- Payment history — 35%
- Credit utilization — 30%
- Length of credit history — 15%
- Credit mix — 10%
- New credit — 10%
Your credit score is mainly affected by your payment history, and late payments can have a significant negative impact. The second most important factor is your credit utilization ratio. To improve your credit score, it’s important to maintain a low credit utilization ratio if you want to achieve good or excellent credit.
Credit experts recommend keeping your credit utilization below 30 percent to maintain a good credit score. This means not exceeding an outstanding balance of $3,000 if your available credit is $10,000. You can make purchases over 30 percent of your available credit, but only if you pay them off within your grace period and avoid turning them into revolving balances or long-term debt.
As you calculate your credit utilization ratio and work on reducing it, remember that you don’t necessarily need a perfect 1%, according to Experian
. In fact, people with perfect credit scores reportedly have an average utilization ratio of 6%.
Credit Utilization Ratio Examples
To help you get a better understanding of how the credit utilization ratio is calculated, it can help to review some examples. Again, to calculate your credit utilization ratio, you need to get the sum of your revolving debt (credit cards and credit lines–no installment loans, such as auto loans or a mortgage), and get the sum of your credit limit across all credit card accounts and credit lines. Then, divide your revolving debt by your credit limit and multiply that number by 100.
Example 1.
Total revolving debt: $22,942
Total credit limit: $31,000
Credit utilization ratio: 22,942 / 31,000 = .74 or 74%
Example 2.
Total revolving debt: $7,384
Total credit limit: $31,000
Credit utilization ratio: 7,384 / 31,000 = .24 or 24%
Example 3.
Total revolving debt: $3,026
Total credit limit: $31,000
Credit utilization ratio: 3,026 / 31,000 = .1 or 10%
Keep in mind that the lower your credit utilization ratio, the better. Typically, a good ratio is considered to be anything 30% or below, and the ideal credit utilization ratio is around 6%. That said, a fast way to improve your credit utilization ratio is by paying down your debt, as illustrated in the examples above.
How To Calculate Your Credit Utilization Ratio In 4 Steps
To calculate your credit utilization ratio, start by adding up all the credit limits on your credit cards. Then, add up all of your credit card balances (total debt). From there, divide your debt by your credit. Next, multiply that number by 100 to get the percentage of credit you’re currently utilizing.
Here’s how to calculate your credit utilization ratio:
1. Add up all of your credit limits (available credit)
To start, get the total amount of credit available to you. In other words, add each of your credit limits from every credit card or credit line you have. To do this, visit your credit card accounts or locate your most recent credit card statement.
For example, let’s say you have the following:
- Credit Card A: $8,000 credit limit
- Credit Card B: $12,000 credit limit
- Credit Card C: $10,000 credit limit
Your total available credit would be the sum of all three credit limits, or $30,000.
2. Add up all of your credit card balances (total revolving debt)
The next step is to add up all of your credit card debt to get your total revolving debt.
Following the same example, let’s say each card has the following amount on them:
- Credit Card A: $4,000
- Credit Card B: $5,000
- Credit Card C: $1,000
In this case, you would have $10,000 in total revolving debt.
3. Divide your total revolving debt by your available credit
Next, divide your total revolving debt by your total available credit.
For example: $10,000/$30,000 = .33
4. …And multiply it number by 100
Take that number and multiply it by 100.
For example: .33 x 100 = 33%
To make the math easy, there are a number of free online credit utilization calculators that can help make it easy. Another way to automatically calculate your credit utilization ratio is by using a credit monitoring service, such as one through Experian, Equifax or TransUnion. For more information, check out our Experian vs Equifax vs TransUnion guide.
3 Best Ways to Improve Your Credit Utilization Ratio Quickly
One of the quickest ways to boost your credit score is to lower your credit utilization ratio, which can be done easily. Ultimately, the key is to either decrease your debt or increase your credit limit. There are a number of tricks to improve your credit utilization ratio, but the three best ways are to pay off your debt, request a credit limit increase or apply for a new credit card.
Here are the three best ways to help lower your credit utilization ratio:
1. Pay down your debt
If you want to decrease your credit utilization ratio, it’s best to pay off your credit card debts. For each dollar you pay off, your credit utilization ratio and overall debt will decrease, which is advantageous. Additionally, clearing your balances means that you won’t have to pay interest on them. In the next few months, assess how much debt you can settle and observe its impact on your credit utilization and score.
2. Increase Your Credit Limit
A helpful tip to decrease your credit utilization ratio is to ask your credit card company for a credit limit increase. This will raise the amount of credit available to you and therefore decrease your credit utilization ratio.
Keep in mind that it will not help improve your credit utilization ratio if you accumulate more debt with your increased credit limit. In order to reap this benefit, you must not increase your balance, despite your higher credit limit.
3. Get a New Credit Card
Getting a new credit card can help reduce your credit utilization ratio. By having more than one credit card, you increase your available credit. If you keep your spending at the same level, your credit utilization ratio will decrease. Additionally, applying for a new credit card can allow you to benefit from rewards, sign-up bonuses, and other perks offered by top credit cards.
Please note that just like increasing your credit limit, in order for this new card to help improve your credit utilization ratio, you need to refrain from using the card and accumulated more debt.
Bottom Line
Keeping your credit utilization ratio low is crucial for maintaining a good credit score. To determine your credit utilization rate, you can use a credit utilization calculator or a credit monitoring app.
If you want to increase your credit score, try decreasing your credit utilization ratio. Even if you have missed payments and high balances, don’t worry. You can improve your score by paying your bills on time and reducing your debts. As you pay off your balances over time, your credit utilization ratio will improve, and your credit score will benefit.
Frequently Asked Questions (FAQs)
Is a 30% credit utilization ratio better than a 50% ratio?
Yes, a 30% credit utilization ratio is better than a 50% ratio. In fact, a ratio of 30% or below is considered a good credit utilization ratio and in general, the lower the better.
What’s the difference between Experian, Equifax and TransUnion?
Experian, Equifax and TransUnion are the three major credit bureaus in the United States. Each bureau collects credit-related information in order to generate credit reports. While each bureau serves the same function, each offers a slightly different set of features for consumers and businesses. Learn more about Experian vs Equifax vs TransUnion.
What is a good FICO score?
A good FICO score is generally considered to be anything above 670. However, “good” is subjective and so depending on what type of credit you’re applying for (e.g., credit card, auto loan, mortgage), you might need a higher score to get approved (or to get approved with a good interest rate). Learn more about FICO and how it calculates your credit score.