What is the Credit Utilization Ratio? Calculate Your Ratio

What is credit utilization?

Credit utilization is a term used to describe how much debt you owe versus the line of credit available to you.

This ratio is calculated by taking all the revolving debt (credit card debt) you currently owe and dividing it by the total amount of revolving credit (credit card limit) you have at your disposal.

Your credit utilization ratio may seem like a random figure, but it’s actually much more important than most people realize. Your credit utilization ratio is one of the most important factors used in determining your credit score, and having a ratio that’s too high could disqualify you from borrowing money or leave you paying higher interest and fees on any loan that you do receive.

For these reasons, it’s important to have an understanding of your credit utilization ratio, and set a goal for reducing or maintaining it at a reasonably low figure. With that said, it’s important to understand the difference between revolving credit and no-revolving credit and how these are factored into your credit utilization ratio.

Revolving credit vs. Non-revolving credit

Revolving credit is a type of credit where you are lent a sum of money, and as you repay the money you borrowed the funds become available again for future use. Credit cards are the best example of revolving credit.

Non-revolving credit, or installment credit as it’s sometimes called, is where you are lent a sum of money once, and you repay it step by step. As you repay the loan, you do not regain access to the funds that you have repaid. Personal loans or mortgages are good examples of non-revolving credit.

It’s important to note that credit utilization ratios only apply to revolving credit. In other words, if you have a loan, the amount you borrow for the loan is not factored into your credit utilization ratio.

How to calculate your credit utilization ratio

If you want to figure out your credit utilization ratio, it’s necessary to remember that it’s only based on your revolving debt, as we mentioned above.

Once you understand this key detail, you can begin to accurately calculate your credit utilization ratio.

To begin, look for the following information on your personal credit profile:

• Total amount you owe on your revolving credit accounts
• Total credit limits you have across all revolving credit accounts.

Once you have these figures ready, you can use the following formula to determine your credit utilization ratio:

Total revolving debt / total revolving credit limits = Credit utilization ratio

As an example, let’s say you currently owe $4,000 across three different credit cards with total spending limits of $12,000. In this case, $4,000/$12,000 shows your debt-to-credit ratio is 33%.

Here is that math again:

$4,000 / $12,000 = 0.33

0.33 X 100 = 33% credit utilization ratio

If you don’t want to do the math yourself, you can also determine this figure with the help of a credit card utilization calculator.

How does credit utilization impact your credit score?

Your credit utilization ratio is a major determinant of your credit score, and this is true regardless of the credit-scoring model being used.

As an example, this ratio is the second most important factor used to determine your FICO score at 30%.

Once again, keeping your credit utilization ratio below 30% of your total credit can help in this category, whereas running up more debt than that can hurt your score in the long run.

Global credit utilization vs. per-card credit utilization

While your credit card utilization ratio is normally based on the total amount of revolving debt you have, you can also determine utilization on a per-card basis. This calculation is determined the same way as overall credit utilization except for the fact it’s based on the per-card debt and per-card limits only.

As an example, let’s say you have a total debt of $4,000 across two credit cards with total credit limits of $10,000. In this case, your overall credit utilization ratio is 40%

If you break it down further, you can see your credit utilization per card. Here is an example of why that can be useful.

Imagine that you have $2,000 in debt on one card with a $2,000 credit limit.

On the other card you have $2,000 in debt with an $8,000 credit limit.

In this case, the credit utilization ratio on the first card is a whopping 100% while the ratio on the second card is just 25%.

Globally, your financial profile would show a credit utilization ratio of 40%.

It’s important to do this exercise as having a maxed-out credit card can be a worrying sign for financial analysts looking at your credit profile. It may signal that you are an untrustworthy borrower.

What is a good credit utilization ratio?

Most experts suggest keeping your credit utilization rate below 30% of your available credit in order to keep your credit score in tip-top shape.

However, you may have an even greater impact with the credit bureaus if you can keep your utilization below 10% of your available credit for the long haul. According to the credit bureau Experian, “consumers with a credit score of at least 800 have an average utilization rate of 11.5%.”

Having a 10% credit utilization rate means owing just $1,000 for every $10,000 in available credit you have at all times. If you charge up balances that are significantly higher than the top of that range, you may see your credit score drop in a short amount of time.

Is 0% credit utilization a good thing?

It’s possible to have a 0% balance-to-limit ratio, and a 0% credit utilization rate is generally seen as a positive thing.

For example, if you’re someone who pays your credit card off several times per month or you rarely use your cards at all, you may have a 0% credit utilization ratio.

This is typically seen as a net positive for your finances since it means you’re not paying the exorbitant interest rates credit cards charge on revolving debt. If you’re using your card and making on-time payments of your full balance each month, you’re also improving your credit through responsible use. Therefore, this is generally a good practice.

How to lower your credit utilization ratio

Whether your goal is credit-building or you want to pay down debt to save money on interest each month, there are several ways to lower your credit card debt and utilization over time.

Here are some of the ways you can lower your credit utilization rate:

• Pay as much as you can each billing cycle:
  If you want to lower your credit utilization rate and credit card debt, you can start by paying as much as you can toward your credit card balances every month. This can help you pay less interest over the long run, and you can also improve your debt-to-income ratio along the way.
• Request a credit limit increase:
  You can call your credit card issuer to ask for a higher credit limit. If a higher limit is granted, this step can lower your credit utilization rate overnight. Requesting a credit limit increase is a soft credit check on your credit report and will not affect your credit score. You can check your credit score at any time to be on the safe side.
• Open a new credit card account:
  Applying for a new credit card can also lower your total credit utilization rate in a hurry. After all, opening a new credit card will increase your total credit available as soon as it’s approved. However, keep in mind that opening too many cards can also hurt your credit score.
• Transfer debt using a balance transfer card:
  If you’re going to open a new credit line, picking a balance transfer card can help you save money on interest for a limited time. Just remember that transferring balances from one card to another almost always requires you to pay a balance transfer fee.
• Stop using credit cards for new purchases:
  Finally, consider limiting the use of credit cards for purchases if your goal is lowering your utilization rate. The more you use credit cards to shop, the higher your credit utilization ratio goes.

How opening or closing a credit card affects your credit utilization ratio

As we hinted at above, opening a new credit card can automatically lower your utilization rate in a short amount of time. This is because a new card will add to your available credit. If you don’t use this new card, you can effectively set a limit on your credit utilization ratio to help you keep it low.

That said, closing an old credit card has the opposite effect on your utilization since it lowers the amount of total credit at your disposal. Therefore, it’s generally a good practice to leave old credit accounts open even if they are not in use. This will also positively contribute to your length of credit history.

Tips for maintaining a low credit utilization rate

When does credit utilization get reported?

Credit card balances typically get reported to the three credit bureaus — Experian, Equifax, and TransUnion — shortly after the end of each card’s billing cycle.

Since billing cycles can begin and end at any time of the month, this means there are no hard-and-fast rules when it comes to the exact time utilization shows up on your credit report.

However, paying your bills before they are reported to the credit bureaus is a practical way to ensure your credit utilization remains low on your credit report.

Does credit utilization fluctuate each month?

Your credit utilization is something you have control over and is based on how much revolving debt you owe at any given time.

Therefore, depending on your spending and payments, your credit utilization will fluctuate.

In some months, the utilization rate that shows up on your credit reports can even be deceiving. As an example, you might make an expensive purchase like a vacation abroad that causes your utilization ratio to surge even though you pay your card issuer in full that month.

Remember that calculating your credit utilization can leave you with a different figure with each passing billing period.