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Smart Money

Why Your Credit Utilization Ratio Is So Important

Your credit utilization ratio can either boost your credit score or drag it down. Find out what credit utilization is and how it impacts your credit.

Melanie Lockert • May 16, 2023

Serious millennial sit on a couch with an open laptop while reviewing financial statements.

In This Article

  1. How does credit utilization affect your credit score?
  2. Why your credit card utilization ratio matters
  3. What is the ideal credit utilization percentage?
  4. How to calculate credit utilization
  5. How to improve credit utilization
  6. FAQs

What is credit utilization?
Credit utilization refers to the amount of credit you’re using compared to how much is available to you. Keeping your credit utilization low can help protect your credit score.

We usually hear about the importance of paying bills on time to protect your credit score. But something that’s less commonly known is the power of your credit utilization. If you haven’t heard the term “credit utilization” before — we’re here to break down what you need to know.

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How does credit utilization affect your credit score?

High credit utilization can hurt your credit, as it suggests that you may be overextending yourself financially. Keeping your credit utilization low, on the other hand, can protect and boost your credit score.

Credit utilization is typically calculated as a percentage of your available credit and signifies the amount of credit you owe. Let’s say, for example, that you have $4,000 in available credit on your credit card. If you’re carrying a balance of $2,000, then your credit card utilization percentage is 50%. If you owe $1,000, your credit utilization is 25%.

A 50% ratio is on the high side and can negatively impact your credit, whereas a 25% ratio is preferable. Try to keep your credit utilization under 30% to protect your credit. When it comes to improving your credit score, it’s best to keep your credit utilization ratio as low as possible.

Learn more about how a Chime Credit Builder card can help you improve your credit score.

Why your credit card utilization ratio matters

When looking at your credit history, your “amounts owed” makes up 30% of your credit score. Your “amounts owed” gives lenders an idea of how dependent you are on credit.

When considering your loan or line of credit application, lenders look at your amounts owed and your credit utilization ratio to assess risk.

A low ratio appeals to a lender, whereas a high ratio can make you look like a risky candidate for a loan or line of credit.

In other words, lenders want to know you have some restraint and won’t use all the credit available to you immediately.

What is the ideal credit utilization percentage?

So, if lenders don’t want you to max out all your available credit, what’s a reasonable amount? What is credit utilization in terms of a good credit utilization ratio?

A general guideline that credit-savvy consumers go by: stick to 30% or below. So, if you have a $1,000 credit limit, try to carry a balance of less than $300.

For better results, you might want to use less. According to credit bureau Experian, “People with exceptional credit scores (800 or higher on the FICO® Score range of 300 to 850) tend to keep utilization under 10% for each card and for total credit card use.”1

In other words, the lower, the better when it comes to credit utilization. If you’re maxing out your credit card and paying it in full and on time, that’s great. But it won’t help your credit utilization, which still makes up 30% of your score.

Remember: Try to keep your credit utilization ratio below 30%.


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How to calculate credit utilization

To calculate your credit utilization, do the following:

  • Add up the balances on all your credit cards
  • Add up the credit limits on all your cards
  • Divide the total balance by the total credit limit
  • Multiply by 100 to see your credit card utilization percentage

For example, let’s say you have the following credit card balances and credit card limits:

Credit cardCredit card balanceCredit card limit

After adding up the total balance ($2,750) and the total credit limit ($6,000), you then divide $2,750 by $6,000, which gets us .46. Then multiply that number by 100 to get your credit utilization percentage, which in this case would be 46%.

How to improve credit utilization

If using too much credit — aka having a high credit utilization percentage — is affecting your credit score, and you’re working on building credit, there are a few things you can do:

  1. Lower your balance. This means using less of your available credit and keeping tabs on how much you owe.
  2. Increase your credit limit. Typically, you can do this by applying for a new credit card or seeing if you can get a limit increase on your current cards.
  3. Try a credit card alternativeConsider opening a card that’s designed to build credit as you pay off your balance each month.

When you apply for a new credit card, your credit score may drop slightly. That’s because there’s a “hard inquiry” — where a lender does a full check on your credit to review your creditworthiness.

Luckily, it can recover pretty quickly if you use that increased limit to your advantage instead of charging more on the card. Overall, having a higher credit limit and lower balance will improve your credit utilization ratio, which is great!

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How does credit utilization affect your credit score?

Depending on the credit-scoring model you are using, how your credit utilization will affect your credit score will vary slightly. With that said, using FICO’s scoring model, your “amounts owed” — which determines your credit utilization, makes up 30% of your credit score rating.

The FICO scoring model looks at your credit utilization in 2 parts. First, it scores the credit utilization for each of your credit cards separately. Then, it calculates your overall credit utilization, that is, the total of all your credit card balances compared to your total credit limits. A high credit utilization in either category can hurt your credit score

If you don’t want your credit utilization to negatively affect your credit score, maintain a credit utilization ratio of 30% or lower. 

What is a good credit utilization ratio?

A credit utilization ratio below 30% is generally considered “good.” A utilization ratio above 30% can seriously damage your credit score. Ideally, your ratio should be in the low single digits for the best credit scores.

When is credit utilization reported?

Every month when you pay your credit card bill, you’re affecting your credit utilization rate. The timing of when a credit card company updates your balance information with the credit reporting agencies can affect your credit utilization. Typically, credit card companies update this information every 30 days at the end of your billing cycle.

Does closing a credit card affect credit utilization rate?

When you close a credit card account, you’re reducing your total credit limit. If you owe nothing on your credit cards, your credit utilization rate is zero, and lowering your total available credit won’t change that rate. However, depending on the age of the closed credit card account, your credit history length could be negatively impacted and affect your score.

How much of your credit should you use?

Try to keep your credit utilization under 30% to protect your credit score and avoid raising any red flags to prospective lenders. Aim for a credit utilization ratio of 10% or lower if you want an exceptional credit score.

Does credit utilization matter if you pay in full?

If you pay your credit cards in full each month, you’ll keep your credit utilization low and help your credit score. Paying off your balance in full can also help you avoid paying interest charges on the amount.

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1 Information from Experian's "How Much Credit Should I Use?" as of May 9, 2023:

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