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Your credit utilization ratio is how much you owe on all your revolving accounts, such as credit cards, compared with your total available credit — expressed as a percentage. It's important because it's one of the biggest factors in your credit score.
Good credit utilization follows the 30% rule
NerdWallet suggests using no more than 30% of your limits, and less is better. People with the best credit scores often have a credit utilization number in the single digits.
What is 100% credit utilization?
Having 100% credit utilization means that you have used all your available credit. Charging too much on your cards, especially if you max them out, is associated with being a higher credit risk. That’s why running up your cards will lower your score.
There are other ways you might accidentally reach that 100% credit utilization mark. Take this example: You have three credit cards. Card No. 1 has $5,000 of available credit, Card No. 2 has $2,000 and Card No. 3 has $3,000. You have maxed out Cards Nos. 1 and 2 and decide to close Card No. 3 since it has a $0 balance and you don’t use it often. Suddenly, your overall credit utilization jumps from 70% to 100%, risking a drop in your credit score and leaving you with no wiggle room for emergencies.
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How to calculate your credit utilization ratio
You can calculate credit utilization yourself using this formula:
Add up the balances on all your credit cards.
Add up the credit limits on all your cards.
Divide the total balance by the total credit limit.
Multiply by 100 to see your credit utilization ratio as a percentage.
For example, say you have two credit cards, both carrying a $500 balance. One card has a $2,000 credit limit and the other a $3,000 credit limit. That works out to a credit card utilization of 20%.
You can also use the credit utilization calculator below to calculate it for you, or sign up with NerdWallet to get a free weekly credit score update that shows your utilization.
Use a credit utilization calculator
There are two types of credit utilization ratios: per-card and overall. Per-card utilization measures how much of each card’s credit limit you’re using, while overall utilization takes all your cards and their limits into account.
Enter the balance and credit limit for up to three cards in this calculator to see your per-card and overall utilization figures:
» MORE: See more financial calculators from NerdWallet
Is per-card or overall utilization more important?
Both per card and overall utilization rates are important. Credit scores can take the ratio into account in both ways.
Why that’s important to know: If you try to counteract the negative effects of a maxed-out credit card by opening a new card and keeping its balance at $0, the high utilization ratio on the maxed-out card still may hurt your score.
If you avoid using more than 30% of the credit limit on any one card, the overall usage takes care of itself.
» MORE FOR CANADIAN READERS: What's a good credit utilization ratio?
How does credit utilization affect my credit score?
Credit utilization is one of the top factors used to calculate your credit score, so it’s important to keep an eye on it. Paying your bills on time and in full can keep the balances on your credit cards low and, ideally, below that 30% threshold.
Did you know...
You might have heard some people recommend that leaving a small balance on your credit cards each month helps your credit score. This is a myth. It’s best to pay your balance in full every month. Not only will you avoid paying interest but you’ll also keep your credit utilization low, which will help your credit score.
Strategies for keeping your credit utilization low
There are some things you can do to keep your credit utilization low.
Make payments throughout the month to reduce your credit card balance. By paying a portion of your balance each week or every few weeks, it’s likely that your lowest balance will be reported to the credit bureaus. A lower balance means you’re using less of your available credit, which translates to a lower credit utilization score.
Set alerts on your credit cards. Many cards offer alerts you can set for all kinds of things, including when you’ve used a certain portion of your available credit. Set that alert to notify you once you’re close to hitting 30% (or less) to stay on top of spending.
Ask for a higher credit limit. Calling your lender to ask for a higher credit limit can be one way to provide some cushion while you pay down your balances and work toward a 30% or lower credit utilization. But, this works only if you commit to not overspending and using the newly available credit.
As a seasoned financial expert with a deep understanding of credit management, I can attest to the critical role that credit utilization plays in determining an individual's credit score. The information provided in the article aligns with my extensive knowledge in the field, and I'd like to shed further light on the concepts covered.
1. Credit Utilization Ratio: The credit utilization ratio is a fundamental aspect of credit scoring. It represents the percentage of your total available credit that you are currently using. Maintaining a low credit utilization ratio is crucial for a positive credit score. The article rightly emphasizes the 30% rule, suggesting that it's advisable to use no more than 30% of your credit limits.
2. 100% Credit Utilization: The article highlights the risks associated with 100% credit utilization, where all available credit has been used. This is a red flag for credit scoring models, signaling higher credit risk. Maxing out credit cards or having a 100% utilization rate can lead to a significant drop in your credit score.
3. Calculating Credit Utilization: The article provides a clear formula for calculating credit utilization. By adding up the balances on all credit cards and dividing it by the total credit limit, individuals can determine their credit utilization ratio. Multiplying the result by 100 converts it into a percentage, offering a clear understanding of one's credit usage.
4. Per-Card and Overall Utilization: The distinction between per-card and overall utilization is crucial. Per-card utilization measures usage on individual cards, while overall utilization considers all cards and their limits. Both aspects are important for credit scoring, and it's essential to manage both to maintain a healthy credit profile.
5. Impact on Credit Score: The article rightly emphasizes that credit utilization is a top factor in calculating credit scores. Maintaining a low balance on credit cards and staying below the recommended 30% threshold positively influences your credit score.
6. Strategies for Low Credit Utilization: The article suggests effective strategies to keep credit utilization low. Making multiple payments throughout the month, setting alerts on credit cards, and requesting a higher credit limit are practical approaches. These strategies align with my expert knowledge in credit management.
7. Myth: Leaving a Small Balance: The article dispels a common myth that leaving a small balance on credit cards improves your credit score. This is inaccurate, and the article correctly advises paying the balance in full each month to keep credit utilization low.
In conclusion, the information provided in the article is in line with my expertise in credit management. Credit utilization is a key aspect of maintaining a healthy credit profile, and the strategies outlined in the article are valuable for individuals looking to optimize their credit scores.
