Understanding Credit Utilization: What it is & How it Works
Summary
Credit utilization is a key factor in determining your credit score, so it’s an important concept to understand. So how does it work? We can help.
In this article:
Credit terms can sound like a foreign language sometimes. Credit utilization is one important financial term you may have heard of but aren’t sure exactly what it is or how important it is to your credit score.
Understanding how credit utilization works can give you a better sense of how credit is measured and the impact it can have on your financial goals. And for younger adults, it’s especially important to get a firm understanding of credit utilization now so you can make more informed decisions about managing your spending, debt and credit in the future.
What is credit utilization?
Credit utilization is the percentage of total credit used in comparison to the total credit you have available.1 This percentage is a factor used by top credit scoring models like FICO® and VantageScore® in calculating your credit score. It can have a big influence on your score, and a general rule of thumb is the lower your percentage, the better.
How is credit utilization calculated?
Credit utilization ratios are calculated in two ways: per card and overall.2 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:
Your overall credit utilization is calculated in a similar way, 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:
How does credit utilization 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.3 The VantageScore 4.0 model also strongly considers your current credit utilization, as well as your trends over the previous two years. What’s most important to remember is that your regular utilization patterns can make an impact in your overall score, no matter which model is used.4
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 keep credit utilization low
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 – This not only keeps your credit utilization low, it can help you pay less in interest as well.
Pay more than once a month – 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 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 to spend. Resist the temptation to add more debt.
Lower utilization rate could lead to higher credit score
The amount of available credit you use can impact your credit score in big ways. Start taking steps today to get and maintain a low credit utilization ratio to ensure that your credit score and your financial future are strong.
This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
