What is Credit Utilization And How Can You Use It To Improve Your Credit Score?

Your credit score takes many factors into consideration when being calculated. Some seem obvious such as paying your balance on time or how long your accounts have been open but one factor that not many know of is credit utilization. 

Credit utilization has a big influence on your credit score, so you should know what it is and how you can manage it to get the best credit rating and the benefits that come with it.

When calculating your FICO Score, credit utilization determines 30% of it making it the second biggest factor. 

In our article on FICO Scores vs VantageScore, we go over all of the factors so if you’d like to have a look here’s the link.

What is Credit Utilization?

Credit Utilization is the ratio of your outstanding credit card balances to your credit card limits. It measures the amount of available credit you are using.

For example, if your credit limit is $1000 and you spend $200 on your credit card, your utilization is 20%. 

The way to calculate credit utilization is by dividing your total credit card debt by your total limit and then multiplying it by 100 to get the percentage. 

When it comes to credit utilization, the lower the percentage the better. A low credit utilization shows that you’re only using a small amount of the credit that’s been loaned to you.

Why Does Credit Utilization Matter?

You may be wondering why it even matters how much of your credit limit you use. If you have a $1000 limit you should be able to use all of it, right?

Well while this may seem to make sense, having a lower credit utilization is better because carrying large balances on your credit cards suggests you’re not able to pay them off in full.

If you’re relying too heavily on credit cards it could indicate that you may struggle to make repayments and even default on credit obligations. 

After all, your credit score is just an indication of how likely you are able to pay back loans and the more debt you have, the less likely it is to be paid back. 

What’s A Good Credit Utilization Ratio?

Experts recommend keeping your utilization below 30%. If you really want a good credit score though, you shouldn’t be going over 10%. 

At the same time however, you don’t want your credit utilization to be 0%. 

This is because 0% indicates that you are not even using the card. Just to be clear though, 0% is much better than having high credit utilization. 

It is best to keep it in the single digits. 

How To Improve Credit Utilization

The first and most obvious way to improve your credit utilization is to pay off any debts that put you over the 30% threshold or even better, don’t go over 30% in the first place. 

If 30% of your credit limit is not enough for your monthly purchases, you could request a higher limit or apply for a new card with a higher limit. The goal is to increase the total amount of credit available to you and not to add to any existing debt you may have.

If you are getting a new card, it is important to remember that account history is also one of the factors when finding your credit score (albeit not as important as credit utilization) so depending on your situation this may or may not be the best option. 

You should also be aware that requesting a higher limit may hurt your score since this can result in a hard inquiry to your credit report.

If you have a few late payments or your income has dropped, you should be wary of requesting a higher limit as the credit provider may even lower your limit. 

And lastly, avoid closing any of your credit cards — especially your oldest one. Closing credit cards often has an immediate negative impact on your utilization percentage (and your credit score) as your credit limit will go down.

Can’t Keep Spending Down? Here’s A Tip. 

If your limit is too low to meet your monthly spending requirements and you don’t think it is in your best interest to request a higher limit or apply for a new card, a good method would be to pay off your credit card several times in a month. 

Doing this will help you stay below 30% all while keeping your spending and limits the same. 

Bottom Line

The key with credit utilization is to keep your balance low and limit high. The better you get at doing both, the more your credit score will increase.