How to Calculate Your Credit Utilization Ratio
Calculating your ratio is straightforward. You divide your total outstanding balances on all revolving credit accounts by your total available credit, then multiply by 100 to get a percentage.
The formula is:
(Total Current Balances / Total Credit Limits) x 100 = Credit Utilization Ratio (%)
For example, imagine you have two credit cards:
- Card A: A $1,500 balance on a $5,000 limit.
- Card B: A $500 balance on a $3,000 limit.
Your total balance is $2,000 ($1,500 + $500), and your total credit limit is $8,000 ($5,000 + $3,000).
The calculation would be:
($2,000 / $8,000) x 100 = 25%
Why Your Ratio Is a Major Factor in Your Credit Score
Your credit utilization ratio is one of the most significant factors influencing your credit score, accounting for about 30% of a FICO Score, according to the credit scoring company itself.
Lenders pay close attention to this number for several reasons:
- Indicates Financial Stress: A high ratio can signal to lenders that you are over-reliant on credit to manage your expenses, which may indicate financial distress.
- Predicts Risk: Borrowers who consistently max out their credit cards are statistically more likely to miss payments. A low ratio suggests you manage debt responsibly.
- Affects Lending Decisions: A high utilization percentage can make it harder to qualify for new loans or credit cards. If you are approved, you may be offered less favorable terms, such as higher interest rates.
What Is a Good Credit Utilization Ratio?
While there is no “official” threshold, financial experts generally recommend keeping your credit utilization ratio below 30%.
- Below 30%: Generally seen as good by lenders.
- Below 10%: Often considered excellent and can have the most positive impact on your credit score.
A ratio above 30% can start to negatively affect your score, and the higher it goes, the more significant the impact. A borrower with a 95% utilization ratio is seen as a much higher risk than one with a 25% ratio.
Strategies to Improve Your Credit Utilization Ratio
If your ratio is higher than you’d like, there are several practical steps you can take to lower it.
- Pay Down Your Balances: The most effective method is to pay down the balances on your credit cards. To have the biggest impact, try to make payments before your statement closing date, as this is when most issuers report your balance to the credit bureaus.
- Request a Credit Limit Increase: If you have a history of on-time payments, you can ask your credit card company for a higher credit limit. This increases your total available credit and instantly lowers your utilization ratio, provided your spending doesn’t increase.
- Open a New Credit Card (With Caution): Applying for a new card can increase your overall credit limit, but this approach has drawbacks. It results in a hard inquiry on your credit report, which can temporarily lower your score. Only consider this option if you can manage new credit responsibly.
- Avoid Closing Unused Credit Cards: Closing an old credit card account reduces your total available credit, which can cause your utilization ratio to increase. Keeping unused accounts open can also help preserve the length of your credit history.
- Check Your Credit Reports: Regularly review your credit report for errors, such as an incorrect balance or a closed account still showing as open. You can get free copies from all three major bureaus at AnnualCreditReport.com.
Frequently Asked Questions (FAQs)
Q: If I pay my balance in full every month, is my utilization ratio 0%?
A: Not necessarily. Your ratio is based on the balance your issuer reports to the credit bureaus, which is typically the balance on your statement closing date. Even if you pay it off completely by the due date, that statement balance is still used for the calculation.
Q: Does a 0% utilization ratio give me the best possible score?
A: While a very low ratio (e.g., 1-9%) is excellent, a 0% ratio across all cards might not be optimal. Scoring models reward active, responsible credit management, so having a small reported balance on one card can be slightly better than having no activity at all. However, the difference is usually minimal, and keeping your utilization as low as possible is the best general strategy.
Q: Does my debit card use affect my credit utilization?
A: No. A debit card draws money directly from your bank account and is not a line of credit. Therefore, it has no impact on your credit utilization ratio. For more information on managing your credit, the Consumer Financial Protection Bureau (CFPB) offers reliable, unbiased resources.