The following article is for informational purposes only and is not intended as credit repair or credit repair advice.
Trying to determine your credit score, how it’s calculated, and how to improve it can seem overwhelming, but it really comes down to just a few key factors. One of those factors is your credit utilization ratio. Even if you pay your bills on time, and even if you pay off your balances every month, you may still end up with a lower score than you expect because of your credit utilization ratio.
A good credit utilization ratio is 30 percent, which means that if you’re utilizing more than 30 percent of your available credit on any account, it may have a negative impact on your credit score.
Finding your ratio
Determining your credit utilization ratio isn’t hard and only takes a few simple calculations. You will either need a copy of your latest billing statement for each account you want to calculate, or the most up to date account information available (if you manage your accounts online or with an app). You can do your calculations for each individual account or for your total debt. You’ll need your most recent balances and current credit limits for each account.
Simply divide your credit card balance by your credit limit. Don’t clear your calculator just yet! Next multiply that number (“x”) by 100 and press “equal” again. That number is your credit utilization percentage.
Example: If your balance is $700 and your limit is $1000 it would look like this: 700/1000 = .70 x100 = 70 percent. For that account, you are utilizing 70 percent of your available credit.
To calculate your total credit utilization ratio, use the same method to add up all of your balances and all of your credit limits then use these numbers in the same way.
Alternatively, you can use our Available Credit calculator to determine how much credit you haven't used across all selected creditor accounts. Subtract that figure from 100 to get your credit utilization ratio.
Why you need to pay attention to your ratio
Your credit utilization ratio will fluctuate as your creditors update your balances and if there are changes to your limits. Since these numbers don’t change on a daily basis and it can be a challenge to keep up with it regularly, the best way to keep your ratio in check is to keep your spending below 30 percent of your limits at all times. If you plan to go above 30 percent, you may want to consider making a payment as soon as possible to lower your balance.
If your ratio is too high, there are a few things you can do to improve it.
- Set up text or email alerts to notify you when your spending nears 30 percent of your limit.
- Utilize several cards and spread your spending out among them.
- Make additional payments throughout the month to keep your balance below 30 percent of your limit.
- Ask your creditor to increase your limit (only if your credit score is good enough to qualify and you won’t be tempted to spend more).
- Keep in mind that some creditors, like retailers and medical offices, have a much lower limit. Your score may suffer if these aren’t within the 30 percent ratio as well.
- Make a plan to pay down your credit cards so that your balance is no more than 30 percent of your limit, then budget to stay on top of your spending.
Your credit utilization ratio is an important factor in determining your credit score so knowing your number and keeping it low will ultimately have a positive impact on your overall score.
Updated January 2020