What Is a Credit Utilization Ratio?

If you’ve ever wondered how lenders decide if you’re a ‘creditworthy’ borrower, your credit utilization is a big piece of that puzzle. Your credit utilization ratio is the amount of revolving credit you use compared to the total credit available to you.

Think of it as a percentage that shows how much of your available credit you’re leaning on. In this guide, we’ll cover why this ratio matters, how to calculate it, and simple ways you can improve it.

A cookies analogy 🍪

Let’s say you have a jar with 10 cookies, and you eat 3 of them. That means you ate 30% of the cookies available to you.

The credit you’re using would be the 3 cookies you ate, and your total credit limit would be the jar with all 10 cookies. So, your credit utilization would be 30%. Lenders want to see that you won’t eat the whole jar of cookies in one sitting!

So, why should you care about this percentage? Because it’s a huge deal for your credit score!

In fact, under the most common scoring models like FICO^®, the ‘amounts owed’ category – which is all about your utilization – makes up a whopping 30% of your score.¹ That’s second only to your payment history.

A high utilization ratio can show lenders that you might be stretched financially, making you seem like a riskier borrower.

On the flip side, a low ratio tells them you’re managing your credit responsibly and don’t need to rely on it to get by, which can help boost your score.

Okay, let’s get down to the numbers. Calculating your ratio is actually pretty simple. You can do it for each card individually and for all your cards combined (which is the number lenders care about most). Here’s the step-by-step:

Here’s how to calculate your credit utilization:

1. Add up the current balances on all your revolving credit accounts (like credit cards).
2. Add up the total credit limits for all those accounts.
3. Divide your total balance by your total credit limit.
4. Multiply that number by 100 to get your percentage.

For example, let’s say you have these cards:

You would divide your total balance of $2,750 by your total limit of $6,000 to get 0.458. Multiply by 100, and your overall credit utilization ratio is about 46%.

When it comes to credit utilization, lower is almost always better. A great rule of thumb is to keep your ratio below 30%. So, if you have a $1,000 credit limit, you’d want to keep your balance under $300.

Want to really impress the credit bureaus? Aim for even lower. People with perfect or near-perfect credit scores often keep their utilization under 5%.

Remember, even if you pay your balance in full each month, the balance reported to the bureaus might be from before your payment, so try to keep it low throughout the month.

If your utilization is a bit higher than you’d like, don’t worry – there are a couple of ways to lower it. The two main strategies are:

1. 1. Lower your balance. This is the most direct approach. Focus on paying down your credit card debt. Even making an extra payment before your statement closing date can help lower the balance that gets reported.
   2. Increase your credit limit. If you have a good payment history, you can ask your current card issuer for a credit limit increase. A higher limit with the same balance will lowers your ratio. Just be careful not to see it as an opportunity to spend more.

You might think closing an old credit card is good housekeeping, but it can hurt your utilization ratio.

When you close a card, you lose its credit limit from your total available credit. If you’re carrying balances on other cards, your overall utilization will go up.

For example, if you have a $4,000 total balance and $12,000 in total limits, your utilization is 33%. If you close a card with a $3,000 limit, your new total limit is $9,000. Your utilization jumps to 44% ($4,000 / $9,000) without you spending a dime!

Carefully run the numbers before closing a credit card account, especially if it’s one of your older ones.

Building credit can feel like a bit of trial and error, but understanding your credit utilization is a huge step in the right direction. It’s not just about paying your bills on time; it’s also about showing you can manage credit responsibly.

For more tips on managing all the factors that influence your credit, see our guide on how to remove a hard inquiry from your credit report.