Understanding Credit Utilization: Why It Matters for Your Credit Score

If you're trying to build or maintain a healthy credit score, one term you’ll hear often is credit utilization. It’s one of the most important factors that credit bureaus consider when calculating your score. But what exactly is credit utilization, and how does it affect your financial health?

What is Credit Utilization?

Credit utilization is the percentage of your available credit that you’re currently using. It applies specifically to revolving credit, such as credit cards and lines of credit.

To calculate your credit utilization ratio, divide your current balance by your total credit limit, then multiply by 100 to get a percentage.

Example:

• You have a credit card with a $5,000 limit.

• You’ve spent $1,500 on that card.

• Your credit utilization is:
  $1,500 ÷ $5,000 = 0.30 → 30%

This means you’re using 30% of your available credit.

Now let’s say you have another card with a $3,000 credit limit and a $500 balance. To find your total credit utilization across all cards:

• Total balance: $1,500 + $500 = $2,000

• Total credit limit: $5,000 + $3,000 = $8,000

• Credit utilization: $2,000 ÷ $8,000 = 0.25 → 25%

Your overall utilization - across all your cards - is the main number you want to keep an eye on. However, Experian reports that your utilization on a single card can hurt your score if it's particularly high.

Why Credit Utilization Affects Your Credit Score

Credit utilization is a major part of your credit score, making up about 30% of your FICO® Score calculation. Credit scoring models see high utilization as a sign of risk. If you're using a large percentage of your available credit, lenders may assume you're spending more than you can afford.

Lower utilization shows that you manage your credit well and aren't relying too heavily on borrowed money. This can improve your creditworthiness in the eyes of lenders, insurers, and credit card companies.

Note that, because your statement date is earlier than your due date, your balances still impact your utilization calculation, even if you pay them in full every month.

What is a Good Credit Utilization?

A good credit utilization ratio is generally below 30%. But the lower, the better. If you're really dedicated to improving your credit score, you may want to set a lower goal - like 10%. 

How to Lower Your Credit Utilization

Here are a few tips to keep your credit utilization low:

• Decrease your balances by paying more than the minimum.
  
  

• Make your payments early - before your statement closing date.

• Spread out purchases across multiple cards, instead of maxing out one.

• Keep track of your utilization in Payoff Genius so you can adjust when needed.

Another way to lower your utilization is to request a credit limit increase. This strategy is not a fit for those with a poor credit score or who are actively struggling with debt. If you try it, DON'T let the higher limit convince you to spend more on your cards - that defeats the purpose.

Final Thoughts

Credit utilization is a key part of your credit health. Keeping it low can help boost your credit score, making it easier to qualify for new loans, refinancing, and better interest rates. Even if you're aiming to be debt-free, your credit score can impact you in other ways.

By understanding how the credit utilization ratio works, you have the tools to use it to your advantage and boost your score.