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What Is a Credit Utilization Ratio and Why Does It Matter?

What Is a Credit Utilization Ratio and Why Does It Matter?

Jenius Bank Team2/22/2024 • Updated 1/16/2025
Person using their credit card to make a purchase on their laptop.
Your credit utilization ratio impacts your credit score. Understanding your credit score is relatively simple on the surface. The higher it is, the better. However, several factors contribute to your score calculation, and the better you understand them, the easier it is to boost your score over time.The credit utilization ratio is one of the biggest, and sometimes misunderstood, factors in credit scores. This ratio shows how you’re managing your debt with credit cards and other revolving lines of credit.

Key Takeaways

  • Your credit utilization ratio compares your balance on revolving credit lines (usually credit cards) against your overall combined revolving credit limit.
  • A low credit utilization ratio demonstrates responsible borrowing and an ability to make payments on new loans and lines of credit.
  • Paying down your credit card balances and increasing your total credit limit could lower your credit utilization ratio.

What Is a Credit Utilization Ratio?

Your credit utilization ratio, sometimes called a credit utilization rate, is the amount of credit you’re using compared to your total available credit. It’s calculated using your revolving lines of credit—including credit cards and personal or home equity lines of credit.1 It doesn’t include installment accounts, like a personal loan, mortgage, or student loan. The ratio measures the amount of credit you’re using and compares it against your credit limits. This calculation may be done on an account-by-account basis or in aggregate to examine your total debt against your total limit.2

How To Calculate Your Credit Utilization Rate

Let’s look at a quick example. Say you have a card with a balance of $5,000 and a total credit limit of $8,000. The formula looks like this: When reviewing your credit score, you may notice that your ratio is being reported as higher or lower than it currently is. This could be from the timing of your payments. Credit card companies, for example, report your balances to the three credit bureaus monthly. This reported balance is used for the ratio.3 So, if you made a sizable payment after your balance was reported, it may take a month for an accurate ratio to be reflected.

Credit Utilization and Your Credit Score

Credit utilization ratios play a major role in calculating credit scores and determining overall financial health. However, the exact way your utilization ratio impacts your score depends on the method used to calculate it.Most lenders look at two main scoring models: FICO and VantageScore. Your total credit utilization ratio makes up 30%4 of your FICO score calculation and 20%5 of your VantageScore calculation. These models may also consider the highest ratio among your revolving accounts in their score calculation.6

Per-Card vs Total Utilization

Credit utilization for revolving credit lines is calculated by adding up all total outstanding balances and dividing by all total available credit—this derives an aggregate percentage as input for your credit score. That said, your credit score may also take into consideration the highest account ratio. So, having a revolving account (like a credit card) near its limit could affect your credit score too.7Let’s see how a per-account ratio compares to an overall ratio. In this example, assume that your only revolving accounts are three credit cards with the following balances:
  • Card A: $1,200 on a card with an $11,000 limit
  • Card B: $800 on a card with a $1,000 limit
  • Card C: $350 on a card with a $3,200 limit
Your total credit debt across all three cards comes to $2,350, and your total combined credit limit is $15,200. Your overall credit utilization ratio would be calculated as follows:Using the same calculation as above at the account level, your per-card ratios look like this:
  • Card A: 10.91%
  • Card B: 80%
  • Card C: 10.94%
To improve your credit utilization ratio in this example, paying down Card B would likely have the most immediate impact since it has the highest per-card ratio.

How Much of Your Credit Should You Use?

As we mentioned above, low credit utilization has a positive impact on your credit score. Most lenders prefer that you have a credit utilization ratio of 30% or less. This shows that you’re managing your existing debt well. A low utilization ratio also shows that if you take on more debt, you’re likely capable of making on-time payments.8However, a high ratio doesn’t mean you won’t qualify for a new loan or credit card. Lenders may ultimately offer you less credit overall and/or charge you more in interest to compensate for what they perceive as higher risk.

How to Improve Your Credit Utilization Ratio

Luckily, there are things you could try to help lower your credit utilization ratio.9
  • Apply for a new revolving line of credit: If your credit is already in decent shape, applying for and accepting a new revolving account could be a good way to increase your total available credit, and subsequently, lower your ratio.
  • Pay down your balances: If you’re carrying a balance on one or more accounts, focus on paying them down and avoid adding to them until you reach your preferred ratio.
  • Keep old accounts open: If you have a line of credit that you don’t use, consider keeping it open. This will help to keep your total available credit higher, and therefore, your credit utilization ratio lower.
  • Ask your lender for a limit increase: If you have a history of making payments on time and in full, you may qualify for a credit limit increase. That increase could help increase your total available credit.
These are just a few ways to improve your credit utilization ratio and potentially boost your credit score. Look at your personal financial situation and consider which methods may work best for your needs.

Final Thoughts

Understanding your credit utilization ratio may make it easier to improve your credit score and set you up for financial success in the long run. However, it’s just one way you could improve your credit score. Another great way to keep your score high is to pay down your existing debt. Not sure how? Learn more about the debt avalanche and debt snowball methods.
Financial WellnessBorrowing & Credit