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.
  • Calculating your credit utilization ratio is relatively straightforward.
  • Experts recommend keeping your credit utilization below 30%.

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What is credit utilization?

Credit utilization is a measure of how much of your available credit you’re using. And it applies to revolving credit accounts like credit cards, personal lines of credit and home equity lines of credit.

It’s sometimes called a credit utilization ratio, but it’s often expressed as a percentage.

How to calculate your credit utilization ratio

Two numbers can help you calculate your credit utilization. One of them is the amount you owe across all of your revolving credit accounts. The other is your total credit limit.

To calculate your credit utilization, follow these four steps:

  1. Add up all of your revolving credit balances.
  2. Add up all of your credit limits.
  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%.

What is a good credit utilization ratio?

According to the Consumer Financial Protection Bureau, experts recommend keeping your credit utilization below 30% of your available credit.

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

Why credit utilization matters & how credit utilization affects your credit scores

Credit utilization matters because it’s one of the factors that affect your credit scores.

Credit-scoring models pay close attention to your credit utilization and consider how much unpaid debt you currently have across all of your accounts. And just how credit utilization and unpaid debt affect your scores can depend on the credit-scoring model.

FICO®, for example, says that debt accounts for 30% of its score. VantageScore®, on the other hand, doesn’t give exact percentages. But it’s clear about what’s crucial to its scoring. VantageScore considers debt to be “extremely influential” to your score.

A low credit utilization ratio could help you maintain good credit scores or even improve your scores since credit-scoring companies may consider it a sign that you’re using your credit responsibly and not overspending. But the opposite is also true: A high credit utilization ratio could have a negative effect on your credit scores.

And it’s important to remember that credit utilization isn’t the only factor impacting your credit scores. Other factors, like late or missed payments, can negatively impact your scores too—even if your credit utilization is low.

How to lower your credit utilization ratio

There are several strategies you can use to improve your credit utilization ratio:

Pay more than the minimum

Making more than the minimum monthly credit card payment and keeping your balances as low as possible is a surefire way to keep your credit utilization as low as possible—even if you can’t pay in full right now.

Ask for a credit limit increase

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 could help you improve your credit utilization ratio—and your credit scores.

Think twice before closing a credit card

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 keep in mind that a credit card with no balance has a credit utilization ratio of 0%. Closing it would decrease your available credit and increase your credit utilization—which could negatively impact your credit scores.

Credit utilization in a nutshell

Credit utilization is an important factor in your credit score, so it’s important to understand how yours is serving you—or not. And the good news is that even if you’re overutilizing your available credit, there are ways you can address it to improve your credit score.

It’s a good idea to monitor your credit so you can keep an eye on your credit utilization and other factors that impact your credit scores.

With CreditWise from Capital One, you can access your free TransUnion® credit reports and weekly VantageScore 3.0 credit score anytime, without negatively impacting your score. You can even see the potential impacts of financial decisions on your credit score before you make them with the Credit Simulator.

CreditWise is free and available to everyone—not just Capital One account holders.

You can also get free copies of your credit reports from all three major credit bureaus—Equifax®, Experian® and TransUnion. Visit AnnualCreditReport.com to learn how.

We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

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