Credit Utilization: Everything You Should Know

Credit utilization is the second most important factor in calculating your credit score. Put simply, utilization refers to the percentage of your credit line you actually use. As you pay your bill-month-to-month, this number is likely to fluctuate. Your actual credit utilization, as seen by the credit bureaus, depends on your balance at the time when your card issuer reports your account to the credit bureau – an event that happens once per month. This guide will dive deeper in the subject of credit utilization and help you understand all the nuances surrounding it.

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Credit Utilization: What Is It? How Does it Work?

Credit utilization refers to the percentage of your total credit line that you actually use in a given month. FICO, the company responsible for the most widely-used credit scoring model, has not officially made a statement on what kind of utilization is best. However, most experts agree that exceeding 30% can have negative consequences for your credit score. However, it should be noted that the effects aren’t drastic and sudden. Your credit score may drop gradually as your credit utilization increases from 0% to 100%.

Your total credit utilization is calculated both as a factor of both your total credit line and the limit of individual cards. Therefore, maxing out one credit card can have a negative impact on your credit score, even if you have four other credit cards that you leave untouched. The next section goes over the math involved in greater detail.

How to calculate your credit utilization ratio?

To calculate your credit utilization on one particular card, divide your outstanding balance by your total credit limit. Multiply the result by 100 to get your utilization expressed as a percentage. If you wish to know your overall credit utilization, repeat the process while summing all your available balances and dividing them by the sum of all your credit limits. The math involved is simple and can be solved with a just a calculator.

Here we’ll demonstrate an example calculation for a user with two credit cards. We will be working with the following two assumptions:

  • Card A has an outstanding balance of $500, and a total credit line of $2,000.
  • Card B has an outstanding balance of $500 and a total credit line of $1,000.

On Card A, the example user has a credit utilization of $500 / $2,000 = 0.25. We then multiply the result by 100: 0.25 x 100 = 25%. Therefore, the utilization on Card A is just 25%. If we wish to calculate the overall utilization, we must first obtain the sum of the balances ($500 + $500 = $1,000), and the sum of the credit limits ($2,000 + $1,000 = $3,000). We then divide the two ($1,000 / $3,000 = 0.33) and multiply the result by 100. The result is our total credit utilization – 0.33 x 100 = 33%.

How Much Does Credit Utilization Impact Your Credit Score?

The impact of credit utilization will differ depending on the specific credit model involved. Most discussions around credit utilization tend to assume the FICO 8 model, which is one of the most widely used models in bank card lending. Keep in mind, however, that many other scores exist and they may apply different weights to your credit utilization. Therefore, the effects it can have on one credit score can be minimal and drastic on another.

For FICO, credit utilization is part of the debt burden portion of your score. This accounts for 30% of your final score, and is the second most influential component after your payment history. In the Vantage 3.0 credit scoring model, on the other hand, utilization accounts for just 20% of your final score. To better understand the role, we ran simulations on the effect credit utilization may have on a sample credit score.

We didn't observe any large changes in credit scores between 2% and 40% utilization. The process of increasing the debt burden in our credit utilization simulation gradually affected the benchmark user's credit score. The biggest inflection points occurred around 43%, 80% and 100% utilization, as one can see in the corresponding table. The total effect of credit utilization appears to have no more than a 30% impact on one's credit rating, which corresponds to the notes released by FICO.

It should be noted that this simulation applies to a very specific credit user, and is by no means an exact representation of the effects your credit utilization may have on your credit score. Even if you fit a similar credit profile to our benchmark user, your score may have very different inflection points, and be impacted by utilization to a greater or lesser degree. Use this table to see the general directionality of the impact credit utilization has on users, rather than an exact measurement.

Our model user had no history of late payments or other derogatory marks. The user also had 5 active credit accounts, with an average age of 1 year.

Credit Utilization

Credit ScoreEffect On Credit Score
2%761N/A
15%755-1%
25%747-2%
30%742-2%
40%732-4%
43%653-14%
80%627-18%
100%533-30%

How to Improve Your Credit Utilization?

Assuming you have your credit card payments under control, and never miss a due date, it makes sense to focus on improving your credit utilization. Optimizing for things like this can move your credit score from average to excellent. Here are a few steps consumers can take to help with decreasing their total credit utilization.

  • Request higher credit limit from your issuer. If your credit score improved since the day you first opened your credit card account, and you have consistently made timely payments, you can ask your issuer to increase your credit limit. So long as you don’t end up charging more money to your card at the same time, doing this will immediately drive down your credit utilization. Before calling with this request, make sure you have a number in mind, as your bank representative will ask how much you would like to increase your credit line by.
  • Pay off your bill mid-cycle. You can make multiple credit card payments throughout the month, not just when your bill is due. Doing this can help reduce your utilization. If your issuer reports your account a few days before your bill’s due date, it may look like your utilization is usually higher than it actually is. Making payments throughout the month will help keep your total balance down, and to make sure it’s low when it gets reported.
  • Be mindful of how much you’re spending. The easiest way to control your total credit utilization is to keep your overall spending in-check. Credit cards allow you to spend beyond your means. Make sure you don’t make purchases that you can’t pay off at the end of the month. If you begin keeping a rolling balance, it will drive up your credit utilization over time. One way to avoid this is to actively monitor your credit card statement throughout the month. Not only can this help you control spending, but also allows you to catch any suspicious activity in the event your card details were stolen.
  • Set up balance alerts. Most major credit issuers allow users to set up balance alerts. You can receive an SMS or e-mail message once your credit card balance hits a certain threshold. You can use this in conjunction with the above step to make sure you are never surprised about how much you spent in a given month.

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