What is the credit utilization ration and what does it mean?

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• Your credit utilization ratio is the percentage of your credit limits that you’re using.
• Your credit utilization ratio is part of the “amounts owed” category, which determines about 30% of your FICO Score.
• Maintaining a lower utilization ratio is best for your credit scores.

Credit scores consider a variety of information in your credit report to calculate your score. One major scoring factor is your credit utilization ratio, which is the ratio between the amount you’re borrowing on your revolving credit accounts compared to your total available credit on those accounts.

Having a lot of debt can lead to a high utilization ratio, which may hurt your scores. But your utilization ratio is also one of the few important scoring factors that you may be able to quickly change to improve your credit score. 

What is credit utilization ratio?

Your credit utilization ratio is the amount of credit you’re using divided by the credit limit on your revolving credit accounts, usually your credit cards. Credit scoring algorithms consider utilization ratios an important factor because high utilization has been shown to correlate with an increased risk that someone will miss a payment in the future. 

That may not be surprising. After all, someone who maxed out their credit cards might be struggling financially or prone to overspending. As a result, they might not be able to afford all their monthly payments or handle a new loan or line of credit. 

How does credit utilization ratio affect credit scores? 

Credit utilization ratio can often have a major impact on credit scores, but the exact effect will depend on the type of credit score — there are many different scoring models — and your overall credit file. 

“Each model has its way of calculating your credit score, including more or less focus on your credit utilization,” says Jay Zigmont, Ph.D., a CFP® professional and founder of Childfree Wealth, an investment advisory firm. Still, utilization is often a major scoring factor.

Your credit utilization ratio is part of the “amounts owed” category, which determines about 30% of your FICO 8 score, the most widely used credit scoring model among creditors. VantageScore 3.0, the second most popular scoring model, incorporates your credit score into 20% of its calculation. 

Credit scoring models consider the utilization ratio of each individual credit account as well as your overall utilization ratio (the sum of your revolving accounts’ balances compared to their total credit limits). As a result, even if you have a low overall utilization ratio, maxing out one of your credit cards might hurt your credit score. 

One silver lining is that many credit scoring models only consider your current utilization ratio. “Most of your credit [score] is based upon things that take time, like your average length of credit and how many months you have paid on time,” says Zigmont. But if your utilization drops from one month to the next, that could have an immediate impact on your scores.

While many creditors still use older models to evaluate applicants, that’s changing with newer models. FICO 10T and VantageScore 4.0, new credit scoring algorithms from FICO and VantageScore, use trended data, which consider your credit utilization ratios over the past 24 months. If they detect an overall trend of increasing credit utilization ratios, that will hurt your credit score.

How to calculate credit utilization ratio

You can calculate your credit utilization ratio by dividing a revolving account’s balance by its credit limit. 

“Only your revolving credit is used in utilization calculations,” says Zigmont. “Credit cards are a common form of revolving credit.” However, other revolving credit lines, such as a personal line of credit or home equity line of credit, could also impact your credit utilization ratio. 

To do the calculation, check your credit report to find an account’s balance and limit. Say you have two revolving credit accounts on your credit report. Account A has a $4,000 limit, of which you’re using $500. You have a $6,000 limit on Account B, and you’re using $2,000. Your credit ratios are 12.5% for Account A, 33.3% for Account B, and 25% overall. This spread won’t necessarily hurt your credit score, but spend any more, and you’ll start seeing a negative effect. You’ll want to bring down your balance on Account B.

If you have multiple credit cards or other revolving accounts, you can check each of the accounts’ utilization ratios and combine the totals to find your overall utilization ratio. 

Some credit monitoring tools, such as Credit Karma and Experian’s credit monitoring service —  both free services listed on our guide for the best credit monitoring services — will also automatically calculate and show your utilization for each credit card and your overall utilization ratio. 

How to lower your credit utilization ratio

To lower your credit utilization ratio, you can request a credit limit increase from your creditor every six months or so. If your request is approved and you’re granted a higher limit, you’ll be able to spend more freely without upsetting your credit utilization ratio. Opening an account can also increase your available credit, which can help lower your overall utilization ratio.

However, opening a new credit account and sometimes even requesting a credit limit increase can lead to a hard inquiry on your credit reports, lowering your credit score. Opening a new credit account will also lower the average age of your accounts, further hurting your credit score. Both of these are temporary effects, overshadowed by potential future growth assuming you manage these accounts responsibly.

On the other hand, “closing an account can negatively impact your utilization as your total credit limits will go down,” says Zigmont. As long as you’re not paying annual fees, there’s very little reason to cancel your credit cards. 

However, you don’t have to do anything as drastic as opening a new credit card to lower your credit utilization ratio. As long as you keep your balances low, you should be fine. It’s important to remember that the balances and credit limits come from one of your credit reports. These won’t necessarily be the same as your current account balance or limit.

Creditors will often report your account details, including the current balance and limit, to the credit bureaus around the end of each statement period. With credit cards, that’s often about three weeks before your bill is due. As a result, you could have a high utilization ratio even if you pay your bill in full each month. 

If you’re trying to improve your credit score while frequently using your credit cards, perhaps to earn rewards, try to pay down the balance before the end of your statement period. You could even make several payments each month. Doing so can lower the balance that’s reported and the resulting utilization ratio.

Credit utilization ratio frequently asked questions