Does higher credit utilization decrease your credit scores?
Credit utilization refers to the amount of available credit you’re using at any given time. When it comes to credit scoring, it’s measured across all revolving credit accounts. That includes credit cards.
When you’ve used a lot of your credit limit, it signals that you might struggle to meet your financial obligations. That’s why your high credit utilization can result in lower credit scores. Luckily, utilization is dynamic. As you use credit, it goes up. But paying down debt can lower it.
Key takeaways
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Credit utilization shows how much you’ve charged to revolving lines of credit relative to their maximum limits.
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A higher utilization rate could signal increased risk to lenders and card issuers, so it may lower your credit scores.
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You may be able to lower your credit utilization by doing things like paying off balances each month or increasing your credit limit.
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According to the Consumer Financial Protection Bureau (CFPB), “Keeping a low credit utilization ratio—under 30 percent—shows lenders you’re responsible and have available credit.”
What is credit utilization and how does it work?
Your credit utilization refers to the amount of revolving credit you’re using relative to your total credit limits. Revolving accounts are open-ended, so you can spend up to a maximum credit limit. Your available credit replenishes anytime you pay down the balance.
What contributes to your credit utilization?
Your credit utilization depends on two main factors:
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Available credit: This figure generally indicates the maximum amount you can charge to all your lines of credit combined.
- Balances: This is the amount you’ve charged to all your revolving lines of credit that’s still unpaid. Your balances may include purchases you’ve made along with interest charges and fees that have accrued on the account.
How do I calculate my credit utilization?
You can calculate your credit utilization by dividing all your revolving credit balances by your total available credit. Say you have only one credit card: If you’ve charged $1,000 to it with a $5,000 limit, for example, then you’re using 20% of the credit line. Here’s how the math works:
$1,000 balance ÷ $5,000 available credit = 0.2, or 20% credit utilization ratio
How does credit utilization impact your credit score?
Generally, a higher credit utilization ratio may result in lower credit scores.
Here’s why: Lenders and credit card issuers may report your account details to the credit bureaus on a regular basis, usually at the end of each billing cycle. Some of those details include your current credit card balances and available credit limits, and they appear on your credit reports.
Credit-scoring companies, such as FICO, use that information to calculate your credit utilization along with your credit score. Credit utilization is one factor used to calculate credit scores, and a higher utilization usually causes your credit scores to drop. That’s because a higher utilization could translate to higher monthly payments on that account. This could strain your finances and cause you to miss payments, which increases risk to your lenders and card issuers.
Consider keeping your credit debt low and available credit as high as possible. For a healthy credit score, the CFPB recommends keeping your utilization below 30%.
How to lower your credit utilization ratio
There are several ways to lower your credit utilization ratio. Here are a few you could try:
1. Make payments toward existing credit card balances
If you have a balance on one or more of your credit cards, consider taking steps to pay off credit card debt. As the balance decreases, your credit utilization ratio will decrease as well.
You may also consider making several payments throughout your billing cycle. Here’s why: You might not know when your card issuer will report your account details to the credit bureaus. But by paying down your card regularly, the bureaus are more likely to see a smaller amount. The lower balance will help reduce your utilization rate.
Plus, making periodic payments can help reduce your interest charges if you’re carrying a balance.
2. Consider requesting a credit limit increase
Your credit utilization is based on two factors: your current balance and your maximum credit limit. So increasing the credit limit on your credit card automatically lowers your credit utilization. As long as you don’t increase spending too.
For instance, having a $2,000 balance on a card with a $5,000 limit means your credit utilization is 40%. But by increasing the limit to $8,000, your utilization falls to 25% without any changes to your balance. The higher limit also makes it easier to stay below the 30% utilization threshold going forward.
To go this route, you can contact your card issuer and ask for a credit limit increase. If you’re a Capital One cardholder, you can request a credit limit increase online. Make sure to have information such as your annual income, employment status, and monthly rent or mortgage payment on hand.
3. Explore credit card debt consolidation
Debt consolidation allows you to take out one loan that pays off two or more debts from loans and credit cards. By combining several balances, you ideally save money with a lower interest rate and make payments easier.
It may also help lower your credit utilization if you consolidate credit card debt using an installment loan. That’s because the loan replaces your revolving balances and won’t factor into your utilization ratio.
4. Keep your credit card accounts open
Your overall credit utilization is based on your available limits and current balances across all revolving lines of credit. Closing a credit card reduces your overall available credit—and if your balances all remain the same, then your utilization percentage automatically increases. Plus, closing the account lowers the average age of your credit accounts. Both factors can lower your credit scores.
It could make sense to close a credit card if the annual fee is no longer worthwhile or the card charges a high interest rate. But if you want to reduce the impact to your credit, then consider keeping your accounts open if possible.
Key takeaways: Credit utilization and credit scores
Your credit utilization shows how much available credit you’re using relative to your available credit across all accounts. Generally, a higher credit utilization can result in lower credit scores.
You can use the free credit score simulator by signing up for CreditWise from Capital One. The interactive tool can help you understand how different scenarios could affect your scores. That includes things such as canceling your oldest credit card and paying down your balance.
CreditWise is free for everyone, and using it won’t hurt your credit scores.
