Credit utilization ratio: What you need to know

Your credit utilization ratio is a measure of how much credit you’ve used versus how much credit you have—typically expressed as a percentage. In general, having a lower credit utilization ratio is better for your credit scores. 

But how do you calculate your credit utilization? What’s considered a good credit utilization ratio? And why does your credit utilization matter? Read on to learn more.

What you’ll learn:

• Credit utilization is a measure of how much of your available credit you’re using across all revolving credit accounts.

• Calculating your credit utilization ratio is relatively straightforward, and experts recommend keeping your credit utilization below 30%.

• Your credit utilization is one of the main factors that’s considered when credit scores are calculated. 

• Paying more than the minimum, getting a credit limit increase and avoiding unnecessarily closing revolving credit accounts may help your credit utilization ratio.

Credit utilization is a measure of how much of your available credit you’re using. It applies to revolving credit accounts, such as credit cards and personal lines of credit. It’s sometimes called a credit utilization ratio, but it’s often expressed as a percentage.

Lenders consider your credit utilization when making lending decisions because it represents how well you’re managing your existing debts. In general, lenders look for a credit utilization ratio of 30% or less. Having a ratio higher than this can signal you’re using too much of your available credit.

Follow these steps to calculate your credit utilization:

1. Add up all of your revolving credit balances.

2. Add up the credit limits of all your revolving credit accounts.

3. Divide your total revolving credit balance (from Step 1) by your total credit limit (from Step 2).

4. Multiply that number (from Step 3) by 100 to see your credit utilization as a percentage.

For example, say your only line of credit is a credit card with a $2,000 limit. If your balance is $1,000, your credit utilization ratio, expressed as a percentage, would be 50%.

If you want to double-check your math, there are online credit utilization calculators that can help. Remember to include all of your revolving credit accounts, including credit cards and personal lines of credit.

Credit utilization matters because it’s one of the factors that affect your credit scores—along with things like credit mix and payment history. Lenders may use credit scores when deciding whether to approve someone for credit and what terms to offer. 

Credit-scoring models may consider your credit utilization and how much unpaid debt you currently have when calculating your scores. Keep in mind that there are many different credit-scoring models. And how credit utilization and unpaid debt affect your scores can vary.

FICO®, for example, says that debt accounts for 30% of its score. VantageScore® says that credit utilization makes up 20% of its scores. Regardless of how it’s weighted, a low credit utilization ratio could help you maintain good credit scores or even improve your scores while signaling to lenders that you’re using your credit responsibly and not overspending. The opposite is also true: A high credit utilization ratio could decrease your credit scores.

Here are a few strategies you may be able to use to lower your credit utilization ratio:

The Consumer Financial Protection Bureau (CFPB) recommends paying off your entire balance whenever possible. But if you can’t, try to pay more than the minimum monthly credit card payment. That way, you can keep your balances and credit utilization as low as possible.

Even if your credit card balance is relatively low, you could still have a high credit utilization ratio if your credit limit is low too. A higher credit limit may help you improve your credit utilization ratio and your credit scores.

Opening a new credit card is one way to increase your overall credit limit and potentially lower your utilization ratio. Opening a new credit card will only help lower your credit utilization ratio if you use the new card responsibly and stay well below its credit limit. 

New credit applications also trigger hard inquiries, which can impact your credit scores. Typically, a single hard inquiry will only cause a small, temporary dip in your scores. But too many hard inquiries in a short period of time may have a more significant impact. The CFPB recommends only applying for credit you need.

If you decide a new card is right for you, you can check for pre-approved card offers from Capital One before you apply. Pre-approval is quick and only requires some basic information. Plus, it won’t affect your credit scores.

If you have a credit card with a zero balance that you aren’t using very often, you might think it’s a good idea to close it. But that credit card with no balance has a credit utilization ratio of 0%. Closing it would decrease your available credit and increase your credit utilization. 

That being said, deciding to close a credit card is a personal choice. Consider your specific circumstances, look at the pros and cons and make the decision that’s right for you.

Credit utilization can be an important factor in calculating your credit scores. And if your credit utilization ratio is too high, there are steps you can take to lower it.

Monitoring your credit can help you keep an eye on your credit utilization and other factors that impact your credit scores. You can get free copies of your credit reports from all three major credit bureaus— Equifax®, Experian® and TransUnion®. Visit AnnualCreditReport.com to learn how.

CreditWise from CapitalOne lets you access your free TransUnion credit report and VantageScore 3.0 credit score anytime, without hurting your scores. CreditWise is free and available to everyone, whether you’re already a Capital One cardholder or not.