What is a credit utilization ratio?

Credit utilization is a measure of how much credit you’ve used versus how much credit you have.

But how do you calculate your credit utilization? What’s considered a good credit utilization ratio? And why does your credit utilization matter? Read on to learn more.

Key takeaways

• Credit utilization is a measure of how much of your available credit you’re using across all revolving credit accounts.
• Calculating your credit utilization ratio is relatively straightforward. There are also online calculators that can help. 
• Experts recommend keeping your credit utilization below 30%.
• FICO® says that debt accounts for 30% of its credit scores. VantageScore® says that credit utilization makes up 20% of its scores. 
• Paying more than the minimum, getting a credit limit increase and avoiding unnecessarily closing revolving credit accounts may help your credit utilization ratio.

Credit utilization is a measure of how much of your available credit you’re using. It applies to revolving credit accounts, such as credit cards and personal lines of credit. It’s sometimes called a credit utilization ratio, but it’s often expressed as a percentage.

Keep in mind that revolving credit is different from installment credit. Installment loans are closed-ended credit accounts that a borrower pays back over a set period of time, like mortgages, car loans and student loans. Installment loans don’t affect your credit utilization ratio.

Follow these steps to calculate your credit utilization:

1. Add up all of your revolving credit balances.
2. Add up the credit limits of all your revolving credit accounts.
3. Divide your total revolving credit balance (from Step 1) by your total credit limit (from Step 2).
4. Multiply that number (from Step 3) by 100 to see your credit utilization as a percentage.

For example, say your only line of credit is a credit card with a $2,000 limit. If your balance is $1,000, your credit utilization ratio, expressed as a percentage, would be 50%.

If you want to double-check your math, there are online credit utilization calculators that can help. Remember to include all of your revolving credit accounts, including credit cards and personal lines of credit.

The Consumer Financial Protection Bureau (CFPB) recommends keeping your credit utilization ratio below 30%.

So, if your only line of credit is a credit card with a $2,000 limit, that would mean keeping your balance below $600.

Credit utilization matters because it’s one of the factors that affect your credit scores. Lenders may use credit scores when deciding whether to approve someone for credit and what terms to offer. 

Credit-scoring models may consider your credit utilization and how much unpaid debt you currently have when calculating your scores. Keep in mind that there are many different credit-scoring models. And how credit utilization and unpaid debt affect your scores can vary.

FICO, for example, says that debt accounts for 30% of its score. VantageScore says that credit utilization makes up 20% of its scores. 

A low credit utilization ratio could help you maintain good credit scores or even improve your scores.  The opposite is also true: A high credit utilization ratio could have a negative effect on your credit scores. Low utilization may also be a sign to lenders that you’re using your credit responsibly and not overspending.

It’s important to note that credit utilization isn’t the only thing that impacts credit scores. Other factors, like payment history and credit mix, can affect your scores too.

Here are a few strategies you may be able to use to lower your credit utilization ratio:

The CFPB recommends paying off your entire balance whenever possible. But if you can’t, try to pay more than the minimum monthly credit card payment. That way, you can keep your balances and credit utilization as low as possible. 

Even if your credit card balance is relatively low, you could still have a high credit utilization ratio if your credit limit is low too. A higher credit limit may help you improve your credit utilization ratio and your credit scores.

Opening a new credit card is one way to increase your overall credit limit and potentially lower your utilization ratio. But credit utilization is just one factor to consider when getting a new card. It’s important to think about the big picture and decide whether having multiple credit cards is right for you. 

Opening a new credit card will only help lower your credit utilization ratio if you use the new card responsibly and stay well below its credit limit. 

New credit applications also trigger hard inquiries, which can impact your credit scores. Typically, a single hard inquiry will only cause a small, temporary dip in your scores. But too many hard inquiries in a short period of time may have a more significant impact. The CFPB recommends only applying for credit you need.

If you decide a new card is right for you, you can check for pre-approved card offers from Capital One before you apply. Pre-approval is quick and only requires some basic information. Plus, it won’t affect your credit scores. 

If you have a credit card with a zero balance that you aren’t using very often, you might think it’s a good idea to close it. But that credit card with no balance has a credit utilization ratio of 0%. Closing it would decrease your available credit and increase your credit utilization. 

That being said, deciding to close a credit card is a personal choice. Consider your specific circumstances, look at the pros and cons, and make the decision that’s right for you.

Credit utilization can be an important factor in calculating your credit scores. And if your credit utilization ratio is too high, there are steps you can take to lower it.

Monitoring your credit can help you keep an eye on your credit utilization and other factors that impact your credit scores. You can get free copies of your credit reports from all three major credit bureaus— Equifax®, Experian® and TransUnion®. Visit AnnualCreditReport.com to learn how.

CreditWise from CapitalOne lets you access your free TransUnion credit report and VantageScore 3.0 credit score anytime, without hurting your scores. You can even see the potential impacts of financial decisions on your credit score before you make them with the CreditWise Simulator. CreditWise is free and available to everyone, whether you’re already a Capital One customer or not.