What Is Credit Utilization Ratio?

• Your credit utilization ratio is the percentage of your credit limits that you’re using.
• Your credit utilization ratio is part of the “amounts owed” category, which determines about 30% of your FICO Score.
• Maintaining a lower utilization ratio is best for your credit scores.
• Read more stories from Personal Finance Insider.

Credit scores consider a variety of information in your credit report to determine your score. One major scoring factor is your credit utilization ratio, which is a comparison of your revolving accounts’ balances and credit limits as they appear on your credit report. 

Having a lot of debt can lead to a high utilization ratio, which may hurt your scores. But your utilization ratio is also one of the few important scoring factors that you may be able to quickly change to improve your credit score. 

What is credit utilization ratio?

Your revolving account’s credit utilization ratio is its balance divided by its credit limit, which tells you how much of your available credit you’re using. Credit scoring algorithms consider utilization ratios an important factor because high utilization has been shown to correlate with an increased risk that someone will miss a payment in the future. 

That may not be surprising. After all, someone who maxed out their credit cards might be struggling financially or prone to overspending. As a result, they might not be able to afford all their monthly payments or handle a new loan or line of credit. 

How does credit utilization ratio affect credit scores? 

Credit utilization ratio can often have a major impact on credit scores, but the exact effect will depend on the type of credit score — there are many different scoring models — and your overall credit file. 

“Each model has its way of calculating your credit score, including more or less focus on your credit utilization,” says Jay Zigmont, Ph.D., a CFP® professional and founder of Live, Learn Plan, a registered investment advisory company based in Mississippi. Still, utilization is often a major scoring factor. Your credit utilization ratio is part of the “amounts owed” category, which determines about 30% of your FICO Score.

Credit scoring models may also consider your overall utilization ratio (the sum of your revolving accounts’ balances compared to their credit limits), and the utilization ratio of specific credit accounts. As a result, even if you have a low overall utilization ratio, maxing out one of your credit cards might hurt your credit score. 

One silver lining is that many credit scoring models only consider your current utilization ratio. “Most of your credit [score] is based upon things that take time, like your average length of credit and how many months you have paid on time,” says Zigmont. But if your utilization drops from one month to the next, that could have an immediate impact on your scores. This is changing with some of the latest scoring models, but many creditors still use older models to evaluate applicants. 

How to calculate credit utilization ratio

You can calculate your credit utilization ratio by dividing a revolving account’s balance by its credit limit. 

“Only your revolving credit is used in utilization calculations,” says Zigmont. “Credit cards are a common form of revolving credit.” However, other revolving credit lines, such as a personal line of credit or home equity line of credit, could also impact your credit utilization ratio. 

To do the calculation, check your credit report to find an account’s balance and limit. You can then divide the balance by the credit limit. For example, if your credit card shows a $2,000 balance and a $4,000 credit limit, then the utilization ratio is 50% because 2,000 / 4,000 = 0.50.

If you have multiple credit cards or other revolving accounts, you can check each of the accounts’ utilization ratios and combine the totals to find your overall utilization ratio. 

Some credit monitoring tools, such as Credit Karma and Experian’s credit monitoring service, will also automatically calculate and show your utilization for each credit card and your overall utilization ratio. 

A trick to lower your credit utilization ratio

It’s important to remember that the balances and credit limits come from one of your credit reports. These won’t necessarily be the same as your current account balance or limit.

Creditors will often report your account details, including the current balance and limit, to the credit bureaus around the end of each statement period. With credit cards, that’s often about three weeks before your bill is due. As a result, you could have a high utilization ratio even if you pay your bill in full each month. 

If you’re trying to improve your credit score while frequently using your credit cards, perhaps to earn rewards, try to pay down the balance before the end of your statement period. You could even make several payments each month. Doing so can lower the balance that’s reported and the resulting utilization ratio.