Credit utilization ratio: What you need to know

Credit utilization is a ratio or percentage that compares how much credit you’re using to how much you have available. It applies to accounts like credit cards. And it’s an indicator of how you manage debt, which is why it’s used to calculate credit scores and assess a person’s creditworthiness. 

What you’ll learn:

• Credit utilization ratios reflect the amount of credit you’re using across all your revolving credit accounts.

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

• To calculate your credit utilization, divide the total amount you owe on revolving credit accounts by their combined credit limits.

• Credit utilization is a major credit-scoring factor, accounting for as much as 30 percent of scoring calculations.

A credit utilization ratio—sometimes called a credit utilization rate—is the percentage of total available revolving credit you’re using. It’s calculated using the balances and credit limits shown from revolving credit accounts, such as credit cards and certain lines of credit.

To calculate your credit utilization ratio:

1. Add your revolving credit balances.

2. Add your revolving credit limits.

3. Divide your total revolving credit balance (from Step 1) by your total credit limit (from Step 2).

4. Multiply that number by 100 to see your credit utilization as a percentage.

For example, if your total credit limit is $20,000 and the balances on your revolving credit accounts add up to $5,000, your credit utilization ratio is 25%. Here’s how that looks when you plug it into an equation:

5,000 ÷ 20,000 = 0.25 x 100 = 25%

Credit utilization is a major credit-scoring factor. But two major credit scorers, FICO® and VantageScore®, take different approaches. FICO calls it “amounts owed” and says it accounts for 30% of its score. VantageScore models weigh credit utilization at 20%.

Credit utilization is dynamic. With credit cards, for example, utilization can be based on things like how someone uses their card and when the card issuer reports their balance to the credit reporting agencies. Doing things like paying on a card balance early and getting another card to increase available credit won’t help if a cardholder doesn’t use their card responsibly and manage spending.

To help lower your credit utilization ratio, you could examine three areas:

The CFPB recommends paying off your entire balance whenever possible. But if you can’t, paying more than the minimum monthly credit card payment could help. Paying your balance before your statement closing date—or making multiple payments during the billing cycle—can help keep your balance lower.

If you have a history of making payments on time, requesting a higher credit limit could help reduce your credit utilization ratio. But credit limit policies differ depending on the card issuer. You might be able to increase your credit limit by asking the issuer for an increase, or the issuer could proactively offer one.

A new credit card is one way to increase your overall credit limit. But increasing your spending could offset any benefits to your utilization ratio. 

And before you close any existing accounts, remember that could decrease your overall available credit—even if you don’t regularly use the card.

Credit utilization is an important factor in calculating your credit scores. If your credit utilization ratio is too high, there may be ways to help lower it. One way is to keep your spending consistent and open a new credit card account. If you’re interested in what Capital One has to offer, you can see if you have guaranteed card offers before accepting.