Understanding Credit Utilization

How Your Usage Affects Your Credit Score

A calculator sitting next to a percent sign
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Credit cards provide the ability to build a credit record and receive a credit score, along with many other benefits. If you have a high credit utilization on your cards, however, you might find yourself with lower credit scores, a more difficult time making larger monthly payments, and a higher interest rate on your cards if you make any payments late.

Credit utilization has a big influence on your credit scores, so you should know what it is and how you can manage it to get the best credit rating and the benefits that come with it.

What Is Credit Utilization?

Credit utilization is the ratio of your outstanding credit card balances to your credit card limits. It measures the amount of available credit you are using.  For example, if your balance is $300 and your credit limit is $1,000, then your credit utilization for that credit card is 30%. If you’re adding $500 per month of new charges on your card and your limit is $1,000, you’ll have a utilization rate of 50%.

To calculate your credit utilization ratio, simply divide your credit card balance by your credit limit, then multiply by 100. The lower your credit utilization percentage, the better. A low credit utilization shows that you're only using a small amount of the credit that's been loaned to you.

Five major factors have an influence on your FICO credit score, the most commonly used credit scoring model:

  • Payment history (35%)
  • Level of debt/credit utilization (30%)
  • The age of credit (15%)
  • Mix of credit (10%)
  • Credit inquiries (10%)

Your credit score—including your credit utilization ratio—is calculated based on the most recent information posted on your credit report. Because credit card information is updated on your credit report based on billing cycles and not in real time, your credit score may not reflect the most recent changes to your credit card balance and credit limit.

The balance and credit limit as of your credit card account statement closing date is what's used to calculate your credit score.

How Credit Habits Factor Into Your Credit Score

The FICO scoring model looks at your credit utilization in two parts. First, it scores the credit utilization for each of your credit cards separately. Then, it calculates your overall credit utilization, that is, the total of all your credit card balances compared to your total credit limits. A high credit utilization in either category can hurt your credit score.

Credit utilization is also a significant factor in the VantageScore system, another type of credit scoring calculation. While VantageScore doesn't assign percentages to each category as FICO does, it lists a combination of credit utilization, balances, and available credit as "extremely influential" and the top factor in its scoring model.

Why Is Using My Card's Capacity Bad?

The purpose of a credit score is to gauge the likelihood that you will repay the money you borrow. Certain factors make people more likely to default on credit obligations. One of those factors is high credit card and loan balances.

Higher balances are more difficult to afford and could indicate that you're overextended. High utilization lowers your credit score and signals to prospective lenders an increased risk that you will fall behind on payments.

Tips to Manage Your Credit Utilization Percentage

To manage your credit utilization, especially if your credit cards get a good workout each month, one of the easiest things to do is set up balance alerts that notify you if your balance exceeds a certain preset limit. Besides keeping an eye on your balances, you can take a number of other steps:

Spread Out Your Charges Over Different Cards

This way you’ll have lower balances on several cards instead of a balance that uses more than 30% of your limit on one card. Keep in mind, though, that some credit scoring models look at your overall usage as well, so this might not always work.

Time Your Payments Right

Find out when your card issuer reports information to the credit bureaus and pay attention to the date you make your card payments each month. If your balance is high when your issuer sends your account information to the credit bureaus, such as a few days before the end of the billing cycle, then the credit utilization used in your credit score will also be high.

Make sure your balance is low by your account statement closing date (the date your billing cycle ends). Check a recent copy of your billing statement to gauge your next account statement closing date.

Ask Your Creditor to Increase Your Card Limit

If you have a card with a $5,000 limit and you’ve spent $2,500, this gives you a 50% utilization rate. You can call your card issuer and ask for a limit increase up to, say, $25,000, if you've had a change in income. This change in your card limit puts you at only 10% utilization, which could make a substantial difference to your credit score. Note, though, that credit bureaus can also ding you for requesting additional credit, since this can result in a hard inquiry to your credit report. 

If you have made a few late payments or switched to a job that doesn’t pay as much income, your card issuer could reduce your credit limit. Consider whether your circumstances will make a good case for a limit increase before you ask for one.

Pay Your Credit Cards Twice Each Month

This is probably the most low-maintenance way to keep your utilization low. This way, even if you’re using the cards throughout the month, a mid-month payment can pay the card back down to a level that stays below the 30% threshold.

Fortunately, a high credit utilization won't hurt your credit score forever. As soon as you reduce your credit card balances or increase your credit limits, your credit utilization will decrease and your credit score will go up.

Article Sources

  1. MyFICO. "Amounts Owed." Accessed Feb. 20, 2020.

  2. Discover. "How Do Utilization Rates Affect My Credit Score?" Accessed Feb. 18, 2020.

  3. Chase. "What, Exactly, Is Credit Utilization Ratio?" Accessed Feb. 20, 2020.

  4. Equifax. "How Credit History Impacts Credit Scores." Accessed Feb. 20, 2020.

  5. Experian. "What Is a Credit Utilization Rate?" Accessed Feb. 20, 2020.

  6. VantageScore. "Understand Your Score: What Influences Your Score." Accessed Feb. 20, 2020.

  7. Consumer Financial Protection Bureau (CFPB). "What Is a Credit Score?" Accessed Feb. 20, 2020.

  8. Consumer Financial Protection Bureau (CFPB). "Will Paying Off My Credit Card Balance Every Month Improve My Score?" Accessed Feb. 20, 2020.

  9. MyFICO. "New Credit." Accessed Feb. 20, 2020.

  10. American Express. "How to Increase Your Credit Limit." Accessed Feb. 20, 2020.