Credit Utilization Ratio: How It Works and Affects Your Credit Score
I used to wonder why my credit score would fluctuate even though I always made my credit card payments on time. It was frustrating. I felt like I was doing everything right, but my score still dipped.
That’s when I learned about my credit utilization ratio. It sounds complicated, but it’s a simple percentage that plays a big role in how lenders view me and my financial reputation.
As I work to boost my credit, understanding credit utilization ratio has helped me make smarter financial decisions and stay on track.
What is credit utilization?
Credit utilization measures how much of your available credit you’re using.
It’s calculated by dividing your total credit card balances by your total credit limits. The result is a percentage that helps lenders see how you manage your revolving credit.
Example:
If your credit card has a $1,000 limit but only a $300 balance, your utilization ratio is 30%.
💡Most experts recommend keeping your utilization below 30% to maintain a healthy score.
Why does this ratio matter?
Lenders look at your credit utilization to see how well you handle debt. A lower ratio tells them you're using credit responsibly, while a higher ratio could raise red flags.
Credit utilization applies to all types of revolving credit accounts, such as credit cards and personal Lines of Credit. It typically doesn’t include auto loans, student loans, or other types of Installment Loans.
How to calculate your credit utilization ratio
Good news! You don’t need to be a math whiz to figure this out. Just follow these simple steps to see how much of your available credit you're using:
- Add up your outstanding balances on all your revolving credit accounts.
- Add up your credit limits on those same accounts.
- Divide your total balance by your total credit limit to get your credit utilization ratio.
- Multiply by 100 to turn the number into a percentage.
Example:
| Credit Card | Balance | Credit Limit | Credit Utilization |
|---|---|---|---|
| #1 | $500 | $1,500 | 33% |
| #2 | $300 | $1,000 | 30% |
| #3 | $200 | $2,500 | 8% |
| Total | $1,000 | $5,000 | 20% |
If your balances add up to $1,000 and your total credit limit is $5,000:
$1,000 ÷ $5,000 = 0.20 → Multiply by 100 = 20%.
What is a good credit utilization ratio?
Most experts — including FICO and VantageScore credit-scoring models — recommend keeping your credit utilization ratio at or below 30%. That means you’re using less than one-third of your available credit.
Staying under that threshold shows lenders you’re managing credit responsibly without relying too heavily on it. Here’s a general breakdown:
- 💯 Excellent: Under 10%
- 👍 Good: 10%–30%
- ⚠️ Needs improvement: Over 30%
While 30% is the commonly recommended limit, aiming for below 10% can have an even more positive impact on your credit score.
Example:
If your total credit limit is $5,000, aim to keep your balance under $1,500.
Want to make an even bigger impact on your score? Try staying below 10% — especially if you plan to apply for new credit soon.
How credit utilization affects your credit score
Your credit utilization ratio plays a major role in your credit score — it accounts for about 30% of your FICO score. This ratio reflects how much of your available credit you’re using and gives lenders a snapshot of your credit habits.
So, why does higher credit utilization decrease your credit score?
A high utilization rate can signal that you’re relying heavily on credit, which might suggest financial stress.
Lenders see a high credit utilization ratio as an indicator of risk, and your score could drop as a result. On the flip side, keeping your balances low shows responsible credit use — and that can help improve your score.
💡 Even short-term spikes — like carrying a high balance when your statement closes — can hurt your score. That’s why it’s smart to pay down balances before your billing cycle ends or aim to keep them low throughout the month.
📊 Experts recommend keeping your credit utilization below 30% — and under 10% if possible — to help improve your score and qualify for better rates and loan options.
➢RELATED: What is Credit Worthiness?
Tips to keep your credit utilization low
I’ve found that keeping my credit utilization low is one of the best ways to protect and improve my credit score. With a few smart habits, you can manage your balances more easily and avoid credit score dips.
💳 Pay down debt
Lowering your credit card balances directly improves your credit utilization ratio. Focus on paying off cards with the highest balances first — or make smaller payments throughout the month to keep balances down.
- 💡Aim for a $0 balance if you can. It helps your score and cuts down on interest charges.
📈 Request a higher credit limit
Asking for a credit limit increase can instantly lower your utilization ratio without changing your spending.
- ❗Don’t overspend just because you have more available credit.
- ❗Avoid asking for multiple increases at once.
🆕 Open a new credit account
Opening a new credit card increases your total available credit, which can improve your utilization ratio.
- ❗New cards may temporarily lower your score due to hard inquiries.
- ❗Only open new accounts if you can manage them responsibility.
🔁 Get a balance transfer credit card
Want fewer payments to juggle? A balance transfer card lets you move debt from multiple cards onto one. Consolidating everything to one card can help you pay down your balance faster and lower your credit utilization without accruing additional interest.
Many balance transfer cards come with a 0% intro APR, which helps you pay off your balance faster without added interest.
- ❗Check for balance transfer fees.
- ❗Create a payoff plan to clear the balance before the promo period ends.
🕰 Leave old accounts open
If you can, keep longstanding accounts open — even if you don’t use them often. Closing them can lower your total available credit, raise your utilization ratio, and shorten your credit history — all of which can lower your score.
- ❗Keep an eye on old accounts to avoid inactivity fees or automatic closures.
➢RELATED: Does Closing a Credit Card Hurt Your Credit?
🔄 Pay your credit cards more often
Making payments more than once a month helps keep balances low and your utilization in check. It also gives you more control over your budget and reduces interest charges.
They don’t have to be massive amounts. Even $50 payments every few weeks can make a difference. Smaller, frequent payments can be easier to manage than one big lump sum.
Notice: Information provided in this article is for informational purposes only. Consult your attorney or financial advisor about your financial circumstances.
About the author
Ashley Masiello is an experienced copywriter and editor who has crafted engaging content for numerous websites and continues to do so with Advance America. She likes to combine her creative personality with clarity to make concepts easy and fun to read.
