How Credit Utilization Is Calculated

Your credit utilization rate, or ratio, is the second-biggest factor impacting your credit score. It’s an important number to lenders — so it should be an important number to you. 

Here we tell you:

  • What a good credit utilization ratio looks like
  • How to calculate your credit utilization rate
  • How to lower your credit utilization rate

What Does Credit Utilization Mean?

Credit utilization is the percentage of credit you’re using relative to how much you’ve been granted. In other words, credit utilization is your debt-to-credit ratio. Typically, lenders and creditors like to see a debt-to-credit ratio of 30% or less.

When your credit utilization rate rises, it’s highly likely your credit score will drop.

How To Calculate Credit Utilization Rate

To calculate your credit utilization rate, follow these simple steps:

  1. Identify the current outstanding balance on your credit card. You can look on billing statements, log in to your credit card customer portal or contact the credit card company’s customer service to find out.
  2. Identify your credit limit. This amount is usually listed on the credit card billing statement or in the customer portal. If it’s not, give the credit card company’s customer service a call.
  3. Grab a calculator. Enter your credit card balance and divide it by your credit limit. Multiply the result by 100.

The number you see is your credit utilization. For example, if your credit limit is $5,000 and your outstanding balance is $2,300, your credit utilization is 46% (2300 / 5000 x 100 = 46).

Repeat the process for each credit card to get individual utilization rates. Then add up all the balances and all the credit limits. Divide the total balance by the total credit limit and multiply by 100 to get your total utilization rate.

Credit Utilization and Credit Score

If your credit utilization rate is high, take it as a signal to check your spending. Outstanding debt accounts for 35% of your credit score, so it’s important to manage what you owe.

Lowing Your Credit Utilization

To lower your credit utilization, follow these tips:

  • Halt your purchasing. If your credit utilization is over 30% on any credit card, stop using it.
  • Get alerts. Ask your credit card issuer to send you an alert when your outstanding balance reaches 20% of your credit limit. With this warning, you’ll know you have only a little bit of room left for spending.
  • Raise your limits. Ask for a credit line increase on your credit card to instantly lower the utilization rate. Do this cautiously for two reasons: First, you don’t want to overextend yourself financially; and second, the request for an increase may result in a hard inquiry on your credit report, which can lower your score in the short term.
  • Double up on payments. Making payments twice a month will lower your balance quicker and reduce your credit utilization. Start by tackling the card with the highest utilization rate first.

While each scoring model calculates the impact of credit utilization a bit differently, lowering the overall rate may have a positive impact on your credit score.  

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