What Is a Good Credit Utilization Ratio?

Credit utilization is the second biggest factor affecting your credit score

Men in suits holding up a percent sign
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Your credit utilization, which is the amount of your credit card balance compared to the credit limit, plays a major role in your credit score. Making up 30 percent of your credit score, credit utilization is the second biggest factor that influences your credit score — second only to your payment history. 

Having a good credit utilization is important if you want to build and maintain a good credit score. As your credit utilization increases, your credit score can go down. A high credit utilization indicates that you're probably spending a lot of your monthly income on debt payments which puts you at a higher risk of defaulting on your payments.

A high credit utilization could lead to your credit card and loan applications being denied. If you are approved, you may have to pay higher interest rates or make a larger down payment than if you had a good credit utilization.

What Is a Good Credit Utilization?

The best credit utilization is 0 percent, which would mean you're not using any of your available credit. However, if you use your credit cards at all, chances are, your credit report won't reflect a zero balance, but that's okay. Your balance and credit limit information update on your credit report often enough that your credit utilization can be improved within 30 to 45 days.

Generally, a good credit utilization ratio is less than 30 percent. That means you're using less than 30 percent of the total credit available to you. On a credit card with a $1,000 limit, that means keeping your balance below $300. Your credit score could drop as your credit card balances rise above that threshold.

Calculating Credit Utilization

Because your credit utilization is a simple ratio, you can easily estimate your own credit utilization. All you need to know are your credit card limits and credit card balances. You can get this information by checking your most recent credit card statement, by logging into your online account, or by calling the toll-free customer service phone number from the back of your credit card to speak to a live representative.

Now for the math. Credit utilization is calculated by dividing a credit card's balance by the credit limit. The result will be a decimal, like 0.5678, for example. Multiply that number by 100 (or simply move the decimal two places to the right) to get a percentage. The result is your credit utilization expressed as a percentage. For example, 56.78 percent is the credit utilization for the above calculation.

Your credit score is calculated using the credit card information available on your credit report at that point in time, which may differ from your current account balance. This happens when you've paid or used your credit card since the last time your account information was updated on your credit report.

How to Lower Your Utilization

Credit utilization is a fluid number. It changes as your credit card balance and credit limits change. That said, you have the ability to lower your high credit utilization — and it will reflect on your credit report (and in your credit score) the next time your credit card issuer reports your balance information. There are generally two ways you can improve your credit utilization.

First, you can reduce your credit card balances. Simply pay as much as you can toward your credit card to lower your balance and your credit utilization quickly. Keep in mind that your credit card issuer may not report your balance until the end of your billing cycle, so leave your balance low until then to ensure that it shows up on your credit report.

If you can't pay down your balance right away, refrain from new credit card purchases and reduce your balance as much as you can. Your balance will go down slowly over time.

Another way to lower your credit utilization is to have your credit card issuer increase your credit limit. However, this may not be easy because it depends on your income, credit history, and how much time has elapsed since your last credit limit increase. Opening a new credit card can also lower your overall credit utilization if you leave most of the credit available on the new card. But remember that opening a new credit card will do a hard pull on your credit and that could affect your score.

Article Sources

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  8. U.S. Small Business Administration. "Credit Inquiries: What You Should Know About Hard and Soft Pulls." Accessed Feb. 10, 2020.