Credit Utilization: What It is, How to Track It and What Experts Consider The Best

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Once I got over the fact that credit cards aren’t evil (thanks, Dad), I realized they actually help build my credit as long as I keep up with monthly payments. This, in turn, will help me secure loans with low interest rates down the road (think: auto loan, mortgage, personal loan, small business loan, etc.).

But soon after I started regularly using a credit card, I quickly learned another lesson: It’s possible to use your credit card too much. No, I didn’t sink into credit card debt; rather, my credit utilization ratio spiked, and my credit score dipped.

But what’s a credit utilization ratio?

In this article, I’ll answer:

  • What’s a Credit Utilization Ratio? How Do I Calculate Mine?
  • Why Is My Credit Utilization Ratio Important?
  • What Do Experts Consider a Good Credit Utilization Ratio?
  • 4 Ways to Lower Your Credit Utilization Rate

What’s a Credit Utilization Ratio? How Do I Calculate Mine?

Also called your credit utilization rate, your credit utilization ratio is the amount of available credit you’ve used.

Your available credit is the maximum amount of rotating credit you can use. Your credit card, for example, might have a credit limit (or spending limit) of $7,000. Your available credit is your credit limit minus your balance. So say you’ve charged $3,000 to your credit card, which has a limit of $7,000. Your remaining credit is $4,000.

To calculate your credit utilization rate, divide the amount of credit you’ve used (your card’s balance) by your credit limit. Then multiply it by 100 (to make it a percentage). Using the above example, your credit utilization rate would be nearly 43%.

Because your credit utilization ratio is calculated using your credit limit across all your credit accounts (think: credit cards, credit lines), it’s easier to let someone (or something) calculate your overall credit utilization.

I already use Credit Sesame (for free!) to check my credit report and keep track of my credit score. It also keeps tabs on my credit utilization rate and notifies me whenever it’s getting too high.

Now, you might be wondering why I’d even care about this percentage. I learned this lesson real quick, so let me explain.

Why Is My Credit Utilization Ratio Important?

A young woman at home looks at her laptop and a credit card.

Your credit utilization ratio is important because it’s a large determining factor when it comes to your credit score. 

Basically, lenders use your credit score to determine your risk when it comes to borrowing money — and paying it back on time. A lower credit score indicates a higher risk. That means you might only qualify for a loan with a high interest rate or not qualify at all.

Here’s a quick review of what goes into determining your FICO score. (Note: your FICO score is just one credit scoring model, but it’s the version lenders typically use.)

  • 35% is payment history.
  • 30% is credit utilization.
  • 15% is length of credit history.
  • 10% is different types of credit.
  • 10% is number of inquiries.

As you can see, payment history and credit utilization are the two most important factors when it comes to determining your credit score. That’s because maxing out your credit cards each month indicates risk. Will you actually be able to make your monthly mortgage payments on time if you’re racking up debt?

The lower you can keep your credit utilization rate (as close to zero as possible), the better. As a general rule of thumb: A low credit utilization rate means a higher credit score; a high rate means a lower credit score.

What Do Experts Consider a Good Credit Utilization Ratio?

The nice thing about using Credit Sesame is that it outlines exactly what affects your credit score and offers suggestions on how to improve it.

For example, when I log into my Credit Sesame profile, it gives me a letter grade for my credit utilization ratio. This helps us number-adverse folks understand if we’re on the right track.

Then, it tells me that using less than 30% of my credit is good — though to really increase my credit score, my best bet is to stay under 10%.

Other credit experts tend to agree. Rod Griffin, the director of public education at Experian, encourages consumers to remember that 30% isn’t your goal or a target.

“You shouldn’t try to reach 30%,” he says. “That’s a max. The lower, the better. Above that, your scores start to suffer.”

Ultimately, lower credit utilization rates are better. In fact, when asked what the ideal credit utilization rate is, Griffin responded simply: “Zero percent.”

5 Simple Ways to Lower Your Credit Utilization Rate

person putting a credit card into a credit card reader.

So you’ve checked your credit utilization ratio on Credit Sesame, and it’s nowhere near that ideal 10% — I’ve been there, done that.

Here are some simple steps you can take to lower your credit utilization ratio and therefore improve your credit score.

1. Decrease Your Spending

This is perhaps one of the easiest ways to lower your credit utilization rate: Simply cut your spending. Or at least don’t charge as much to your credit card. Then, you’re using less of your available credit.

But if you’re like me and use your credit card more like a debit card so you can reap the cash back and free travel rewards, consider these other tips.

2. Pay off Your Credit Card Balance Early

To keep your credit utilization low, you’ll need to do more than pay your credit card bill on time — you’ll need to pay it before your credit card company reports your usage to the credit bureaus.

However, this can get a bit tricky.

Credit card companies typically report your credit usage to the credit bureaus at the end of your billing cycle. But some will report it at the end of each month — or not at all. You’ll want to contact your card issuer and ask.

Once you know, you can make efforts to pay down — or, better yet, off — your credit card before your credit utilization is reported so you can avoid a hit to your score.

3. Ask Your Credit Card Issuer for a Credit Limit Increase

If you spend responsibly and pay off your card on time, it might be time to call your credit card company and ask for a higher credit limit. As long as you don’t have an exorbitant amount of debt, it typically won’t be an issue.

The idea is to give yourself additional credit — but to keep your spending the same. So if you typically charge $1,000 to your credit card each month and have a $5,000 credit limit, you’re already using 20% of your total available credit. Increase your credit card limit to $7,000, and you’ve just automatically bumped your credit utilization down to 14%.

And remember: Just because you have more room to spend money doesn’t mean you should.

4. Open Another Credit Card

Similar to increasing the credit limit on your credit card, you might consider opening a new credit card to increase your total available credit. Your credit limit on the new card will vary, and you likely won’t know what it is until after you’ve been approved, but it should give you a little boost.

Note, however, applying for a credit card will trigger a hard inquiry into your credit history so the company can evaluate your risk (and thereafter approve or deny you), which could temporarily lower your credit score.

5. Get Text Alerts When Your Utilization Ratio Gets Too High

My final tip? Keep your credit utilization top of mind.

I know, I know. You don’t go to Target and, while admiring that floor lamp, think to yourself: “Hmmm… I wonder how this purchase would affect my credit utilization ratio?”

If you charge it to your credit card, though, it just might. You can set up balance alerts on your credit card account, or I use Credit Sesame’s text alerts to keep tabs on my overall credit score.

I admittedly often get credit monitoring alerts that let me know my utilization rate is creeping into dangerous territory. Then, I can cut back my credit card spending or hop into my account and make a payment.

Take Control of Your Credit

Your credit utilization ratio plays an important role in your credit score, but here’s the thing: Once you understand what it is and how it works, it’s easy to take steps to keep it low. In fact, it’s one of the easiest credit scoring factors to keep on top of — as long as you can keep your spending in check.

Carson Kohler (carson@thepennyhoarder.com) is a staff writer at The Penny Hoarder. She didn’t realize the importance of her credit utilization ratio until she’d swiped her credit card a few too many times… 

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

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