Having good credit comes with a lot of benefits. You may have an easier time qualifying for loans and credit cards. When you do qualify for financing, lenders may be willing to offer you better rates which can save you money. In fact, having good credit might even make it easier to find a job.


But earning good credit takes time and hard work. It also requires a lot more than simply paying your bills on time (though your payment history is certainly important). You also need to understand credit card utilization and how the relationship between your credit card limits and credit card balances can potentially have a big impact upon your credit scores.

What Is Your Credit Utilization Ratio?


Credit utilization is a term used to describe how much revolving credit you’re using compared with how much revolving credit is available to you. It’s primarily a measure of the percentage of your credit limits you’re tapping into on your credit card accounts.


Credit scoring models pay close attention to your revolving utilization rate because high utilization rates help lenders predict the risk of doing business with you. Depending on the types of accounts on your credit report, as much as 30% of your credit score may be based on your credit utilization.

How to Calculate Credit Utilization


Calculating your credit utilization rate is easy. You don’t even need access to a credit card utilization calculator to do it. The calculator on your smart phone will be enough.


Just divide your credit card balance by your credit card limit. That’s your individual utilization rate. You can also calculate your overall or aggregate utilization rate by dividing your total credit card balances by your total credit card limits.


Here’s an example of how to calculate credit card utilization on an individual account:


  • Balance: $1,000
  • Limit: $2,000
  • Balance ($1,000) ÷ Limit ($2,000) = 0.50 = 50% Credit Card Utilization Ratio


What Is a Good Credit Card Utilization Ratio?


When it comes to credit utilization, a lower rate is typically best in the eyes of scoring models like FICO and VantageScore. FICO reveals that people with excellent credit scores over 785 typically use only 7% of their available revolving credit.


It’s also worth noting that the credit utilization which appears on your credit reports isn’t updated in real time when you make a new charge or payment. Instead, it’s generally only updated once a month — shortly after the statement closing date on your account.

So, if you want a zero balance and a 0% utilization rate on your credit report for the next 30 days, you’ll need to plan ahead. You’ll have to make sure to pay your credit card down to $0 before your card issuer sends an update to the credit bureaus on your next statement closing date.

Lowering Credit Utilization


Trying to improve your credit? Lowering your credit utilization ratio can be a great place to start. Not only will paying down your credit card debt potentially give your credit scores a boost, it could help you to save money on interest at the same time.


If you’re ready to get started, consider the following approach. Make a list of all of your outstanding credit card balances, from the highest amount owed to the lowest. Make at least the minimum payment each month on all of your accounts to avoid late payments. Then, dedicate every extra dollar you have to paying off the credit card with the smallest balance first. Once you’ve paid off that card in full, move to the next account on your list and repeat.


By paying off your credit cards in this order (smallest balance to the highest), you’ll lower the revolving utilization rate on individual cards faster. Since credit scoring models are designed to pay attention to both your aggregate credit utilization and the credit utilization on individual accounts, this approach could potentially benefit your credit scores more quickly.


Finally, remember that credit cards can work for you or against you when it comes to your credit scores. It all comes down to how you manage your accounts. If you want your credit cards to help you establish good credit, make sure to keep them paid on time and aim to maintain a low credit utilization ratio each month.


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