What You Need To Know About Your Credit Utilization Ratio
Your credit utilization ratio is an important part of your financial health. It measures how much available credit you’re using, and it contributes to your FICO score. Some aspects of your credit score are hard to fix — missed payments, for instance. Luckily, credit utilization is a little different.
Learn how to calculate your credit utilization ratio — and what you can do to improve it — with our guide.
1. Your Credit Utilization Ratio Only Considers Revolving Credit
Revolving credit provides ongoing, or revolving, access to capital up to a certain credit limit. As you repay the amount that you borrow, that amount is available again to reuse. Two of the most common types are credit cards and lines of credit. Your credit utilization ratio only considers this type of credit. Basically, it measures how close you are to your credit limit on your accounts.
Installment loans, such as personal loans, are a different kind of credit. They are not used to determine your credit utilization ratio. However, personal loans can still affect your credit score in other ways, including payment history and credit mix.
2. There Are Two Ways to Calculate Your Credit Utilization Ratio
You can use data from your revolving credit accounts to calculate a total credit utilization ratio or a per-account credit utilization ratio.
To calculate a total credit utilization ratio, we’ll use the following example:
Sarah has a credit card with $2,000 limit and a revolving line of credit with a $5,000 limit. She currently has a $1,000 balance on her credit card, and just paid off her line of credit balance.
To find her total credit utilization ratio, we’ll use the following equation:
Total revolving credit balances / Total revolving credit limits) x 100 = total credit utilization ratio
With Sarah’s data, the equation would look like this:
$1,000 / $7,000 x 100 = 14% credit utilization
Sarah is using 14% of her total revolving credit. Experts recommend keeping your credit utilization ratio under 30%.
For a per-account credit utilization ratio, we’ll use the same example:
Sarah has a credit card with $2,000 limit and a revolving line of credit with a $5,000 limit. She currently has a $1,000 balance on her credit card, and just paid off her line of credit balance.
To calculate the per-account credit utilization ratio, we’ll calculate each account separately. Use the following equation:
Revolving credit balance per account / Revolving credit limit per-account x 100 = per account credit utilization ratio
With Sarah’s information, the equations are as follows:
$1,000 / $2,000 x 100 = 50% credit utilization for the credit card
And:
$0 / $5,000 x 100 = 0% credit utilization for the line of credit
When it comes to your credit, scoring models may consider both.
3. Your Credit Utilization Ratio Contributes to Your Credit Score
Your credit utilization ratio is a big factor when it comes to credit health. In fact, it’s part of a category that makes up 30% of your credit score. Payment history is the only category that’s more important when it comes to your credit, as it makes up 35% of your score. Read more about the factors that make up your credit score.
4. Your Credit Utilization Ratio Can Be Too High
Experts recommend keeping your total credit utilization ratio below 30% across all revolving credit accounts. Using too much of your available credit can impact your FICO score, which can carry a number of negative consequences. For instance, lenders may decline credit requests for new loans or credit limit increases if you’re using too much of your available revolving credit.
Unlike missed payments and defaults, your credit utilization ratio is something you can immediately improve. To do this you have two options: pay down your balance, or increase your credit limit.
5. Increasing Your Credit Limit Can Lower Your Credit Utilization Ratio
As long as you don’t change your credit usage, increasing your credit limit can actually help improve your credit score by reducing your utilization ratio.
We’ll use the information from the example above.
Sarah requested a credit limit increase for her line of credit account, which was raised from $5,000 to $7,000. She still does not have a balance on her line of credit. However, she still has a $1,000 balance on her credit card with a $2,000 credit limit.
To calculate her total credit utilization ratio, we’ll use the following equation:
(Total revolving credit balances) / (Total revolving credit limits) x 100 = total credit utilization ratio
With Sarah’s data, that equation looks like this:
$1,000 / $9,000 x 100 = 11% credit utilization ratio
Sarah’s total revolving credit utilization ratio was reduced from 14% to 11% by increasing her credit limit on her line of credit.
About Bonnie
Bonnie is a Chicago transplant who's committed to seeing the world on a dime. As an avid news junkie with an affinity for finance, she loves to help others do more with less.
