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Credit Utilization Ratio & How It Affects Your Credit Score

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Your level of credit utilization is measured by comparing your credit card balances to your total credit card limits. This calculation is known as the credit utilization ratio, and lenders use it to evaluate how well you manage your finances. A credit utilization of less than 30% and greater than 0% is generally considered good.

Credit Utilization Calculator

Our credit utilization calculator can help you calculate your credit utilization ratio for each card and all of them together. Your credit utilization is calculated by dividing your total credit balance by your total available credit. The ratio illustrates your credit usage, is represented by a percentage, and should be less than 30%.

Credit Utilization Ratio = Total Credit Balance / Your Total Available Credit

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How the Credit Utilization Ratio Works

How the Credit Utilization Ratio Works

Credit utilization is the ratio of the outstanding balances on your credit cards to your total credit limit. If you haven’t used your credit card in the past and there is no balance on them, your credit utilization ratio would be 0%. Credit providers will take note if you have a balance on at least one of your cards and are utilizing your available credit limit.

Your credit utilization is the second most important category of your credit score, next to your payment history, and accounts for 30% of your score. A high credit utilization ratio can indicate either overspending or that you’re failing to pay down your existing debt. As a benchmark, you generally want to keep your credit utilization ratio below 30%, but the lower, the better.

The FICO credit scoring model looks at your credit utilization in two parts:

  • Each credit card: A comparison of your balances and credit limits for each card individually; it’s important to keep each cards’ credit utilization ratio below 30%
  • All credit cards collectively: A calculation of your overall credit utilization ratio across all of your credit card, keeping the total ratio below 30%

Although a lower score is better, most credit agencies see 1% utilization better than 0% because it shows that your credit card accounts are active. A low credit utilization ratio shows that you’re using less of your available credit. Credit scoring models interpret this as a sign that you’re managing your credit well and doing this can help you build a strong credit score.

Credit Utilization Chart

The credit utilization chart shows that if you have outstanding balances of $2,500 on credit cards with a limit of $50,000, your credit utilization ratio would be 5%. A ratio like this would be considered good because people should target a credit utilization ratio of 30% or less.

Here is an example of the credit utilization ratio and how it works:

Who Should Monitor Their Credit Utilization Ratio

Individuals and small business owners should monitor their credit utilization to maintain a strong credit score or improve their current credit score. This is an important factor of your personal credit score and should be tracked if you are looking to qualify for a new personal loan or business loan.

Here’s a look at who should monitor their credit utilization:

  • Individuals: Most personal loan, mortgages, and home equity lines of credit (HELOCs) require people to have a good personal credit score, which can you can improve with a lower credit utilization ratio
  • Small business owners: Most small business loans require the owners of the business to have a good personal credit score, which is a snapshot of your personal credit history, and the credit utilization ratio affects your score

Keep in mind that this is an important factor when credit agencies are evaluating your score. Paying your credit card balance before your credit issuer reports your balance information can help keep your credit utilization low. You can do this by paying multiple times a month or asking your issuer when they report your balance to the credit agencies.

Your credit utilization ratio comes into play when credit agencies are determining your credit score at the end of the month, and it’s a good habit to pay off your balance before that information is reported.

How to Calculate Your Credit Utilization Ratio in 3 Steps

The credit utilization ratio can be calculated for each card or on all overall basis. It’s important to note that lenders will take both into consideration when you’re applying for a personal or small business loan. You can calculate your ratio by taking your balance and credit limit from your monthly statement and dividing the two.

The three steps to calculate your credit utilization ratio are:

  1. Gather information: Locate your current balance and credit limit on your monthly statement from your credit card issuer
  2. Get your ratio: Divide the credit card balance by the credit limit
  3. Convert to a percentage Multiply by 100 to get a percentage

7 Tips to Improve Your Credit Utilization Ratio

Credit utilization is a fluid number that is always changing based on how much you’re using your credit cards. With that in mind, you can improve your credit utilization ratio that will reflect on your credit report the next time the credit card issuer reports your balance.

There are seven tips to improve your credit utilization ratio.

1. Pay Down Your Credit Card Debt

The easiest way to improve your credit utilization ratio is to pay off some of your existing credit card debt. Every time you make a payment that results in reducing your outstanding principal balance, your credit utilization ratio will improve.

2. Request a Higher Credit Limit

You can also improve your credit utilization ratio by requesting an increase in your credit limit. For example, if you have a balance of $7,000 and a credit limit of $10,000, your credit utilization ratio would be 70%. If your credit limit increases from $10,000 to $20,000, your credit utilization ratio would improve to 35%. Remember, it’s important to resist spending up to the new limit.

3. Apply for a New Card

If you’re looking to improve your overall credit utilization, compared to a single card, you may want to consider applying for an additional credit card. Opening a new credit card would increase your overall available credit limit, which would improve your credit utilization ratio.

This option, however, can hurt your personal credit score in the short term because too many inquiries in a short period of time can influence your credit score. So, you want to be aware of how many accounts you have recently opened if any.

4. Avoid Closing Credit Cards

When you pay off one of your credit cards, you are lowering your total credit balance. By leaving the card open, you’re maintaining your total available credit limit and lowering your credit utilization ratio. Remember, by lowering your credit utilization, you’re improving your credit utilization ratio.

5. Make Multiple Payments Each Month

Credit issuers report your credit balance to credit agencies once a month. If you’re someone who usually pays their bill in full, but your credit issuer reports your balance information before the end of the month, it can look as if you have a high balance. You can avoid this by making more than one payment per billing cycle or checking with your credit issue to confirm when they report your balance information.

6. Set Balance Alerts

Balance alerts can be the best reminders to paying down your balance more than once a month. This can also help prevent overspending and protect you from using too much of your total available credit.

7. Transfer Your Balances to Business Cards

Since small business credit cards don’t show up on your personal credit report, these balances won’t impact your credit utilization. After you transfer a balance, that debt will no longer be hurt your credit utilization ratio. You can search and compare cards by visiting the FitSmallBusiness Credit Card Marketplace, which is primarily for business credit cards.

Your credit utilization ratio is the second-most impactful category of your credit score. If you’re looking to get a free credit score, we recommend using Nav as it offers free personal and business credit scores, which includes a summarized credit report.

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Pros & Cons of Focusing on Your Credit Utilization Ratio

Typically, it’s a good idea to always focus on your credit utilization ratio to boost your credit score, experience easier loan approvals, and maintaining a low balance. Keep in mind that there are other categories that impact your credit score like your payment history, age of credit, credit inquiries, and the types of credit you use.

There are several pros and cons of focusing on your credit utilization ratio.

Pros of Focusing on Your Credit Utilization Ratio

The pros of focusing on your credit utilization ratio:

  • Higher credit score: Focusing on your levels of credit utilization can help maintain a good credit score or boost your current credit score; with it being the second highest factor that goes into your credit score, keeping your credit utilization ratio below 30% can result in a higher credit score
  • Easier loan approvals: When lenders are doing a credit check, they will evaluate your per card and overall credit utilization ratio along with your credit score; having a level of credit utilization that is low can make for an easier approval on the transaction
  • Lower credit card balance to repay: The big plus to focusing on your credit utilization ratio is that it means your balance should be relatively low compared to your total available credit; you will generally have a low balance to repay, which means you’ll also pay less in interest

Cons of Focusing on Your Credit Utilization Ratio

It’s generally a good idea to always focus on your levels of credit utilization as it plays a major role in determining your personal credit score. Although, it’s important to remember there are a few other factors that credit companies use to come up with your credit score. There’s truly only one con of focusing on your credit utilization and that is forgetting to pay attention to the other factors that go into your credit score.

The other factors that go into your personal credit are:

  • Payment history: This is the most important category of your credit score and takes into account the payment history of both revolving accounts, such as credit cards, and installment loans
  • Length of credit history: The length of time each account has been open and the length of time since the account’s most recent activity
  • New credit inquiries: Credit agencies look at how many new inquiries you have made, such as new accounts, in a time period; new inquiries will lower your average account age
  • Types of credit used: The mix of accounts you have open shows lenders your ability to manage your debt obligations responsibly

I sat down with Randall Yates, CEO and founder of The Lenders Networks, who touched on the cons of focusing on your credit utilization ratio and he said:

Randall Yates - credit utilization“If you’re overly focused on your credit utilization ratio, you’ll likely use your credit much less often. This will cause you to miss out on a card’s benefits, such as points or cash back. It’s good to maintain a low credit utilization because you’ll have a higher credit score, and you’ll pay less interest.”

Focusing solely on your credit utilization ratio can cause these other factors to go unwatched, which can hurt your credit score. Although the second most important factor is your credit utilization ratio, you must take all of these into consideration to earn the highest credit score possible.

Ratios Used in Addition to Your Level of Credit Utilization

In addition to the credit utilization ratio, there are additional ratios that individuals and small business owners should focus on. These ratios include the debt to income (DTI) ratio, a key factor lenders use to evaluate your individual creditworthiness, and debt service coverage ratio (DSCR), which is important for small businesses owners. These two ratios show your ability to repay your debt.

Debt-to-Income Ratio

DTI measures the percentage of your monthly debt payments to your monthly gross income. Lenders check this ratio during the application process for most personal and small business loans and typically require a DTI of 36% to 43% or lower. This ratio is important because it shows lenders your ability to repay loans and other debt obligation.

The formula to calculate your DTI ratio is:

DTI ratio = (total monthly recurring debt payments) / (total gross monthly income)

Debt Service Coverage Ratio

For small business owners, in addition to DTI and credit utilization ratios, the DSCR is also be used. Lenders use the DSCR to make sure the business is generating enough income to pay its debt. It’s calculated by dividing a business’s annual net operating income by its current year’s debt obligations.

The formula to calculate a business’s DSCR is:

DSCR = (business annual net operating income) / (current year’s debt obligations)

Credit Utilization Ratio Frequently Asked Questions (FAQs)

We covered many different bits and pieces related to credit utilization and the credit utilization ratio in this article. There are some questions which are asked more often than others, and we address those here. If you have any other unanswered questions, please feel free to share them with us on our FitSmallBusiness forum, and we’ll provide an answer.

What Is Credit Utilization?

Credit utilization is a measure of your credit balance compared to your total available credit limit. This calculation is represented by a percentage, which is also the credit utilization ratio. The big takeaway here is that you want a low credit utilization ― typically less than 30% ― which will improve your personal credit score.

How Can I Lower My Credit Utilization?

It’s common that people are always looking for ways to improve their credit utilization ratio to either maintain their current credit score or improve their credit score. By lowering your credit utilization ratio, this will show you are using your credit responsibly.

Some of the best ways to improve your credit utilization ratio are:

  • Pay off your balance
  • Request a higher credit limit
  • Apply for a new credit card
  • Avoid closing credit cards
  • Make multiple payments per month
  • Set balance alerts
  • Transfer your personal balance to business cards

What Is a Good Credit Utilization Ratio?

A good rule of thumb is to keep your credit utilization ratio of less than 30%. This means you’re using less than 30% of your total available credit line (e.g., $3,000 balance on a $10,000 credit limit). A lower credit utilization is generally better as long as it’s not 0%.

How Does Using My Credit Card Affect My Credit Score?

Using your credit card can positively affect your personal credit score, as long as you make timely payments and keep your credit utilization ratio below 30%. If your balances to grow to a level above 30%, your credit score could be lowered. This could result in higher credit card interest rates and potentially lower limits.

Is the Credit Utilization Ratio Calculated Per Card?

Your credit utilization ratio is calculated by dividing your balance by your credit limit for each card and for all of them together. Lenders will generally take both into consideration when qualifying you for a loan because it’s a measure of how much of your available credit you’re using.

How Much of a Balance Should You Leave on Your Credit Card?

Depending on your total available credit, you should target a balance that results in a credit utilization ratio of less than 30% but greater than 0%; for example, you wouldn’t want a $2,000 balance on a card with a $3,000 limit because your credit utilization would be 67%.

The Bottom Line

The credit utilization ratio is the second most important factor of your credit score and measures how much of your available revolving credit you’re using. It’s based on a percentage that is calculated by dividing your total credit card balance by your total available credit limits. Generally, it’s a good idea to keep this at less than 30%.

Focusing on your credit utilization ratio is a terrific way to build a good credit score and take control of your credit spending. To see how your credit utilization has impacted your credit score, we recommend using Nav’s free personal and business credit score services.

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