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What is the Best Credit Utilization Ratio?

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Your credit utilization ratio is a number showing how much available credit you’re currently using. It plays a significant role in determining your overall credit score.

Lenders typically favor credit utilization ratios below 30% since it shows you can manage debt effectively.

Here’s what you need to know about your credit utilization ratio, including how it’s calculated, how it affects your credit score and ways to improve it.

What is a credit utilization ratio?

Typically expressed as a percentage, your credit utilization ratio looks at your current debt in relation to your total available credit. This shows lenders how much credit you’re actually using.

For example, a $2,000 balance on a single credit card with a $10,000 limit equals a credit utilization ratio of 20%. All ratios must be combined to calculate your final credit utilization score if you have multiple cards or lines of credit.

Your credit utilization ratio includes your revolving debt, such as credit cards, home equity and personal lines of credit. However, the balances on installment loans — like mortgages or personal loans, student loans or auto loans — aren’t included in your credit utilization ratio (although they are used to calculate other parts of your credit score).

Since your credit utilization accounts for 30% of your FICO Score, keeping your available credit limits high and your current debts low is wise. Maxing out your credit cards will increase your utilization ratio, and lenders may view you as a potentially risky borrower.

What is a good credit utilization ratio?

A low utilization ratio is best, which is why keeping it below 30% is ideal. If you routinely use a credit card with a $1,000 limit, you should aim to charge at most $300 per month, paying it off in full at the end of each billing cycle.

The 30% credit utilization rule

While many credit experts recommend keeping your credit utilization ratio below 30% to avoid a significant dip in your credit score, the 30% rule should be considered the maximum limit, not your ultimate goal.

In reality, the best credit utilization ratio is 0% (meaning you pay your monthly revolving balances off). But keeping your utilization in the 1% to 10% range should help improve your credit score, as long as the other aspects of your score are within reason.

How does credit utilization help or hurt your credit score?

How does credit work? Basically, five main factors influence your overall credit score:

  • Payment history (35%): Payment history includes whether you’ve made past credit card and loan payments on time and helps future lenders determine the likelihood you’ll repay debt.
  • Amounts owed/credit utilization (30%): As discussed, this includes the amount of revolving credit (credit cards, etc.) you use compared to your total credit limit for all combined accounts.
  • Length of credit history (15%): This is how long your credit accounts have been open and how long it’s been since you used certain accounts. A high average age of accounts can help boost your credit score.
  • New credit (10%): Applying for new credit can result in a hard credit inquiry, which could lower your score by a few points each time you apply.
  • Credit mix (10%): Your credit mix looks at how many different types of credit accounts and loans you have. Maintaining a diverse range of credit accounts shows lenders that you can manage various financial obligations.

How do you calculate your credit utilization ratio?

To figure out how your credit utilization ratio stands up, you’ll need to know the total debt owed and the credit limit of each credit card or line of credit. Once you have this, divide what you currently owe by your credit limit to find your credit utilization ratio.

Because credit-scoring models consider your overall credit ratio, you’ll need to do this calculation with each card or line of credit to get a complete picture of how each account may help or hinder your credit score.

Credit utilization ratio example

Debt typeCredit limitAmount owedCredit utilization ratio
Credit card #1$10,000$5,00050%
Credit card #2$7,000$2,00029%
Home equity line of credit$20,000$7,00035%
Overall totals$37,000$14,00038%

As seen in the chart above, each per-card or line of credit utilization is relatively high, bringing your total utilization score to 38%. Remember, the goal is to stay below the 30% utilization threshold (with the 1% to 10% range considered ideal).

What is a bad credit score?

The FICO Score is the most popular credit-ranking system among lenders. Numbers range from 300 to 850, with a bad credit score typically falling below 580. Here’s a breakdown according to myFICO:

  • Exceptional: 800+
  • Very good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: Below 580

You can check your most current credit score at AnnualCreditReport.com or by requesting a copy of your credit report from any of the three major credit bureaus: Equifax, Transunion and Experian. Accessing your credit report is free and won’t negatively impact your credit score.

Having a bad credit score might limit your current and future financial options. For example, lenders might view a low score as a sign that you’re an irresponsible borrower. As a result, getting a mortgage or an auto loan might be more difficult. Although bad credit loans exist, they often come with less favorable interest rates and terms.The good news is that you can take steps to improve your credit score and repair your credit history. Doing so may help open more doors while strengthening your financial health.

How can you improve your credit utilization ratio?

Lowering your utilization ratio is fairly straightforward, plus it’s one of the fastest approaches to increasing your credit score. Here are five ways to boost your available credit while reducing your debt:

Pay off your debts

Paying off your balances is one of the best ways to lower your utilization percentage. Getting your balance down to $0 is an excellent goal to have. Not only will this decrease your credit utilization ratio, but you’ll also avoid paying monthly credit card interest.

Request a credit line increase

Increasing your current credit limits is usually easier than paying down balances. You can contact your credit card companies to request a limit increase on your existing accounts (some allow you to do this online with a few clicks).

While increasing your credit limit should help improve your credit score, it may result in a hard inquiry on your credit file. Again, a single inquiry is generally no big deal, but multiple inquiries could drag your score down.

Most importantly, try to avoid spending the extra funds since that will defeat the whole purpose of increasing your credit limit.

Keep credit accounts open

Because closing a credit card account will lower your available credit (as well as reduce the length of your credit history), it’s best to keep old accounts open whenever possible.

Additionally, make small charges on the account regularly to avoid an issuer closing your account due to inactivity. However, reach out to your credit card company if a particular card charges an annual fee — they might be able to downgrade it to a no-fee credit card, allowing you to justify keeping the account open.

Consolidate your debt

Another strategy for reducing your credit utilization ratio is to consolidate your debt with a personal loan, or consider using a personal loan to finance a large purchase instead of a credit card. Unlike revolving lines of credit, a personal loan is considered an installment loan — allowing you to borrow money at a fixed rate with a predetermined repayment timeline. Once the funds are disbursed, you can spend them however you wish.

Debt consolidation loans can be worth it if you find a lower interest rate. Transferring your debts over to a personal loan can bring your credit utilization ratio down — but only if you avoid the temptation to charge those cards back up again. Crunch the numbers with our debt consolidation calculator to ensure you get the best deal.

Alternatively, you can also open a balance transfer credit card, which will increase your available debt while making it easier to manage your existing credit card balances with one combined monthly payment.

Try to find a 0% interest promotional offer or an interest rate lower than what you currently have. You may need to pay up to 5% of the transfer to move existing debts to the new card, which will cause a high balance at first — but once you begin to pay it down, your credit score will reflect the new ratio.

Apply for a new credit card

Adding a new credit card to your credit mix is another strategy for lowering your credit card utilization. In addition, you can take advantage of credit card sign-up bonuses and cashback offers.

However, this isn’t the best action plan if having access to more credit results in spending more. Ultimately, it’s worth creating a solid budget and sticking to it. Credit cards can be valuable tools if used responsibly.

Here are some pros and cons to consider before opening another credit card:

ProsCons

  You can increase your available credit and lower your credit utilization ratio — assuming you don’t use the new card to fall into a destructive debt cycle.

  You can consolidate debts into a balance transfer card, which may lower your credit utilization ratio, reduce your debt payoff timeline and save you money.

  Applying results in a hard inquiry on your credit report, which could ding your credit score by around five percentage points. 

  A new card reduces your average age of accounts. This could hurt your credit score, as the length of your credit history accounts for 15% of it and lenders prefer borrowers with more substantial usage experience.

  More credit means more opportunities to take on debt, potentially raising your credit utilization ratio and leading to higher interest charges.

If your credit utilization ratio is higher than it should be and your credit score is suffering, you can always make moves to improve it. Check out our guide to working toward a better credit score for more information.

 

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