Understanding Credit Utilization

Credit utilization refers to the percentage of available credit that you're using across credit cards and additional lines of credit. This is determined by the balances shown in your credit report. Credit utilization plays a significant role in determining your credit score and can impact your ability to access credit in the future.

Why is it important?

Credit utilization accounts for a significant portion of your credit score, specifically 30% of your FICO score. A high credit utilization ratio may indicate to lenders an excessive dependence on credit, potentially categorizing you as a higher-risk borrower. Keeping a low credit utilization ratio can have a positive impact on your credit score. This shows lenders that you can responsibly manage your credit and may increase your chances of being approved for loans or credit cards in the future.

How is it calculated?

To determine your credit utilization ratio, begin by summing up the credit limits across your revolving credit lines. Next, add up all your current balances owed on these revolving credit lines. Then, divide the total debt by the total credit limit, and then multiply this figure by 100 to calculate your credit utilization ratio.

For example, if you have a $6,500 balance on a credit card that has a $10,000 credit limit, your credit utilization ratio is 65%.

How do I lower my credit utilization ratio? 

Lowering your credit utilization can lead towards improving your credit score. Here are a few ways to lower your utilization rates:

1. Pay down balances: Aim to pay off your debts early. Even small additional payments can make a difference over time.
2. Request higher credit limits: If you’re in good standing, your credit card issuer may be willing to raise your credit limit. Consider requesting an increased credit limit if you've responsibly held the card for some time and consistently made on-time payments. However, be aware that seeking a higher credit limit might result in a credit inquiry or pull, potentially causing a temporary dip in your credit score.
3. Spread out your charges: Instead of using one card for all purchases, distribute your spending across multiple cards to keep the individual and overall utilization low.
4. Don't close your credit cards: It may seem logical to close a credit card that you no longer use, but doing so could lower your available credit and increase your overall utilization rate.