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How Does Credit Utilization Work?

How Does Credit Utilization Work?

By Matthew Diehl • January 16, 2020

Credit terms can sound like a foreign language sometimes. Take credit utilization — what is it? How is it calculated? And how important is it to your credit score?

If you’re wondering all of these things and more, here’s some information to help you understand how credit utilization works:

What is credit utilization?

Credit utilization is the ratio of the amount of available credit you have versus the amount you’re using.1 This percentage is a factor used by top credit scoring models like FICO® and VantageScore® in calculating your credit score.2 Credit utilization can have a big influence on your score, and a general rule of thumb is the lower your percentage, the better.

How credit utilization is calculated

Credit utilization ratios can be calculated in two ways: per card and overall.3 To see the percentage per card, simply divide the total balance of a credit card by its credit limit then multiply that number by 100. For example:

Example of calculating credit utilization ratio per card

Your overall credit utilization is calculated in a similar way,3 except it represents the total amount of credit you're using on all of your individual cards. Here’s an example using three credit cards:

Example of calculating overall credit utilization ratio

How credit utilization can affect your credit score

Each scoring model ranks credit utilization differently, but it’s a significant factor in most calculations. For example, it makes up 30% of your FICO score, making it the second overall factor behind payment history.4 The VantageScore 4.0 model doesn’t provide percentages of influence, but their #1 Extremely Influential scoring factor is “Total Credit Usage, Balance and Available Credit.”5

While there’s no universal standard for a “good” credit utilization ratio, 30% or below is the general guideline per card and overall. This shows the scoring models you don’t need to rely on credit and may have less difficulty repaying new debt. The less of a risk you present, the higher your credit score can go.

How to lower your credit utilization

If your credit utilization ratio is high, try one or more of these strategies to bring it down and potentially improve your credit score:

  • Pay more than the minimum due each month – Paying more than the minimum each month not only keeps your credit utilization low, it can help you pay less in interest as well.

  • Pay more than once a month – If making one large payment doesn’t work for your budget, try paying a little extra whenever you can. Every little bit helps to bring your balance down.

  • Leave credit cards open after paying them off – Once you pay a credit card balance down to $0.00, don’t close the account. All of that unused credit can help lower your overall credit utilization.

  • Set balance alerts – Alerts can help curb overspending and keep your balances, and utilization, low. Common options include texts, push notifications and emails.

  • Request a credit limit increase – If you’ve been responsible with your account, your creditor may increase your available credit. But remember — this extra credit is to lower your utilization rate, not for spending. Resist the temptation to add more debt.

Lower utilization rate = higher credit score

The amount of available credit you use can impact your credit score. Now that you know how credit utilization works and ways to get a low ratio, you have the tools to enhance an important factor of your credit score.



1. Fiano, Liane. “Credit score myths that might be holding you back from improving your credit.” Consumerfinance.gov. https://www.consumerfinance.gov/about-us/blog/credit-score-myths-might-be-holding-you-back-improving-your-credit/ (accessed December 16, 2019).
2. Konsko, Lindsey. “How to Calculate Your Credit Utilization Ratio.” Nerdwallet.com. https://www.nerdwallet.com/blog/finance/how-is-credit-utilization-ratio-calculated/ (accessed December 17, 2019).
3. Konsko, Lindsey. “How to Calculate Your Credit Utilization Ratio.” Nerdwallet.com.
4. MyFICO. “What's in my FICO® Scores?” MyFICO.com. https://www.myfico.com/credit-education/whats-in-your-credit-score (accessed December 17, 2019).
5. VantageScore. “What influences your score.” VantageScore.com. https://your.vantagescore.com/score-influences (accessed December 14, 2019).


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