What is a Credit Utilization Rate?

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Updated: 22nd Dec 2020
Written by Kim Pinnelli
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December 22, 2020
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Many factors affect your credit score, and your credit utilization rate is the second-largest. If you don’t pay attention to it, you could damage your credit score even if you have a solid payment history.

Here’s what you must know.

What is a Credit Utilization Rate?

Your credit utilization rate is a comparison of your outstanding credit card debt versus your total credit lines.

For example, if you have a total of $5,000 in credit card lines and $1,500 in outstanding credit card debt, you have a 30% utilization rate.

Why Does Credit Utilization Ratio Matter?

Your credit utilization ratio shows lenders how well you handle your credit. If you have a high credit utilization ratio, you may not be financially responsible. It’s a sign that you always need to dip into credit cards to afford what you buy.

If you have a lower ratio (credit scoring models like it at 30% or less), it shows you are financially responsible and don’t overspend.

Revolving Credit

Only revolving credit affects your credit utilization rate. That’s because you have endless use of your funds. If you borrow money and pay it off, you can use the credit again. The higher your utilization ratio is, the more money you owe and the less financially responsible you look.

Installment loans and mortgage loans, on the other hand, have a finite loan limit and you only receive the funds once. You can’t reuse the funds and lenders know when you’ll pay the loan off in full.

How Much Does Credit Utilization Affect Your Credit Score?

Your credit utilization rate makes up 30% of your credit score. It is the second-largest portion of your credit score.

  • Payment History (35%)
  • Credit Utilization (30%)
  • Credit History (15%)
  • Credit Mix (10%)
  • New Credit (10%)

This means if you use up more than 30% of your available credit, you stand a good chance of hurting your credit score. Ultimately, making it hard to get new credit.

Learn More: How to Build Credit

How to Calculate Credit Utilization

It’s easy to calculate your credit utilization rate. You take your total debt and divided it by the total credit line.

For every $1,000 credit line, you shouldn’t have more than $300 outstanding:

$300/$1,000 = 30%

Per-Card vs Total Utilization

Some credit models look at your utilization rate on a per-card basis (individually).

You can calculate the utilization rate for each card by taking your total outstanding credit divided by your total credit line.

For example, if you have $250 outstanding on a $1,000 credit limit credit card, you’d do the following:

$250/$1,000 = 25%

Some credit scoring models take your total outstanding credit compared to your total credit limit for all cards. For example, if you have 3 credit cards with the following:

  • Credit card 1 – $250 with a $1,000 total credit line
  • Credit card 2 – $1,200 with a $3,000 total credit line
  • Credit card 3 – $0 with a $1,000 total credit line

Your credit utilization rate would be:

$1,450/$5,000 = 29% credit utilization ratio

What is a Good Credit Utilization Rate?

A good credit utilization rate is any rate below 30% of the total credit line. This shows that you don’t use up any money available to you and you are financially responsible.

What is a Bad Credit Utilization Rate?

Any utilization rate over 30% is ‘bad.’ Now if you’re a few percentage points over 30%, it may not hurt your chances of approval a lot.

But, if you have a utilization rate well over 30% or worse yet, maxed out, it hurts your credit score considerably and makes it hard to get new credit.

Should You Open Credit Cards to Improve Your Credit Utilization Rate?

Opening a new credit card MAY help your credit utilization rate, but it’s not always the right answer.

In the short-term, it improves your utilization rate, which should help your credit score. But new credit hurts your credit length and puts a new inquiry on your credit report. If you have a lot of inquiries, one more could put you over the edge.

If you already have too many credit cards, it could hurt your credit mix also. This means you could have three factors counting against you just to get a new credit card and ‘possibly’ help your utilization ratio.

Does Closing a Credit Card Lower My Credit Utilization Rate?

Closing a credit card can hurt your utilization rate considerably, especially if it’s the only credit card with—$ 0 balance.

You lose the cushion of the extra unused credit line. If you aren’t careful, you could increase your utilization rate to 100% just by closing one card.

Closing a credit card also hurts your credit length (shortens it), which also hurts your credit score.

How to Improve Your Credit Utilization Ratio

The best way to improve your credit utilization rate is to pay your balances off, but you must do so strategically.

Set Up Balance Alerts

Set a limit on your sending and opt into alerts letting you know you’ve reached that limit. Your credit card company will send a message via text or email reminding you that you are at your limit and not to spend anymore.

Make Two Payments Per Month

Find out when your credit card company reports balances to the credit bureau. If it’s not after you normally make your payment, make two payments a month. This way you’ll lower the balance before they report to the credit bureau, even if it’s only half the payment amount.

Ask for a Higher Credit Limit

Increasing your credit limit decreases your credit utilization ratio. Let’s say you have $500 outstanding on a $1,000 credit limit. That’s a 50% utilization rate and hurts your credit score. If you ask your credit card company to increase your limit to $2,000, your ratio falls to 25%.

Monitor Expenses

As always, watch what you spend. Don’t buy something you can’t afford to pay off in full or as close to it as possible.

Related: Best Credit Monitoring Services

Bottom Line: What is a Credit Utilization Rate?

Pay close attention to your credit utilization rate. It’s one factor you can easily control for your credit score. Watch what you spend and pay off your balance as quickly as possible.

If that doesn’t work, ask for a credit line increase or make payments multiple times a month to pay your balance down before the credit card company reports it to the credit bureaus.

More Resources:

Kim Pinnelli
Kim Pinnelli
Kim is a personal finance expert with a Bachelor’s degree in Finance from the University of Illinois at Chicago. She has been freelance writing for 13 years for a number of large publications. Kim thoroughly enjoys helping people take charge of their personal finances.