What is credit utilization and how does it impact your credit?

Your credit score is impacted by multiple factors, most notably by your payment history. But, while this factor might get most of the attention, there’s an almost equally important one that can have a major impact: the credit utilization ratio.

The credit utilization ratio indicates the percentage of your revolving credit — that is, credit cards and lines of credit — you’re currently using. And managing it wisely can be one of the quickest and most efficient ways to boost your score.

What is credit utilization and how does it impact your credit?

As we said above, your credit utilization ratio reflects how much of your revolving credit you’re using at a given point in time — that is, how much debt you owe versus how much credit you still have available.

Here’s what you need to know to manage it well.

How do you calculate your credit utilization ratio?

This ratio is calculated by dividing your revolving credit debt by your total credit limit.

For example, if you have three credit cards and a line of credit, you should add up their respective credit limits and then how much you owe on them. Let’s say their total credit limit is $20,000 and your outstanding balances add up to $10,000 — if so, your credit utilization rate would be 50%. ($10,000 / $20,000 = 0.5)

What is a good credit utilization ratio?

It’s often said that both lenders and credit bureaus prefer a credit utilization ratio below 30%. However, the truth is that much lower is better. In fact, according to data collected by credit bureau Experian in 2022, consumers with ‘very good’ (740-799) or ‘exceptional’ (800-850) FICO scores have 14.7% and 6.5% utilization rates, respectively.

Note, however, that these top scorers don’t have a 0% utilization rate. Many experts say that it’s good to use some of your credit so that you can show a pattern of responsible usage.

Tips for improving your credit utilization ratio

One of the best — and fastest — ways to improve your credit score is by reducing your credit utilization ratio. Here are some ways you can do so:

Keep track of your revolving credit

If you have multiple credit cards and/or lines of credit, then you’ll need to track how much you spend — and how much credit you still have available. A good way to do this is by setting up balance alerts with your card issuer, which will notify you when you’ve passed a certain spending threshold.

Avoid maxing out any of your cards, which will have a significantly negative impact on your score. And, if you find your utilization rate is too high — that is, 30% or higher — then it’s time to pay down that balance as much as you can. Make sure to read our guide to How to pay off credit card debt for tips on how to do just that.

Ask for a higher credit limit

If you have a history of on-time payments and your income has risen substantially from when you first got the credit card, you have a good chance of negotiating a higher credit limit with your card issuer.

Many banks allow cardholders to request a higher credit limit online by logging into their account. However, you can also call and talk to a customer service representative. This could be a better choice as it allows you to discuss your financial information thoroughly and, hopefully, persuasively. You should be prepared to provide income and work history information, along with other personal information.

Once you have a higher credit limit, you should monitor your spending and make sure you keep credit utilization low — in the single digits if possible.

Pay before the due date

Lastly, paying your card early could help reduce your credit utilization rate and improve your score.

Credit cards have a statement closing date, which marks the end of your billing cycle. This is the day when lenders send your monthly bill. It's also usually around the same time they report your account details to the credit bureaus.

If you pay down your balance before your closing date, you could reduce the credit usage reported to the bureaus and potentially boost your score.

You can typically find your card’s closing date on your monthly statement or through your online banking account. You could also call the customer service number on the back of your credit card and ask.

What is credit utilization and how does it impact your credit? FAQs

Why is my credit score going down when I pay on time?

There are a few reasons why your credit score could be going down even if you pay on time. For example, one of the most common reasons for a drop in your credit score is maxing out one or multiple credit cards. This decreases your credit utilization ratio and increases your total debt, which can negatively impact your score. If your score keeps going down and you haven’t maxed out a card or taken out new lines of credit recently, make sure to check your credit reports from all three bureaus (Experian, TransUnion and Equifax) for signs of identity theft.

Why does higher credit utilization decrease your credit score?