Your credit utilization ratio is the amount of debt you’re carrying divided by your credit limit across all your revolving credit accounts. The lower your ratio, the better, as this is one of the factors that determine your score and helps lenders get an idea of your creditworthiness.
What is credit utilization?
Your credit utilization rate, or ratio, represents the amount of credit you’re currently using compared to your total credit limits. Your credit utilization ratio falls in the amounts owed category for your FICO credit score, which makes up 30% of your credit score and is the second most important factor behind your payment history.
It’s sometimes called your revolving credit utilization because it only calculates your revolving credit. Revolving credit includes credit cards, personal lines of credit and home equity lines of credit. Installment loans, like a mortgage or car loan, aren’t considered in your credit utilization ratio, but they are considered in other ways in the amounts owed category of your FICO credit score.
Both FICO score and VantageScore — two credit scoring models used to determine your credit score — consider your credit utilization a top factor in calculating your credit score.
Lenders use your credit utilization, among other factors, to evaluate how well you manage your debt. They typically prefer a credit utilization ratio of 30% or lower. Carrying more debt than 30% of your total limit may indicate you have trouble repaying what you borrow.
How to calculate your credit utilization ratio
To calculate your credit utilization ratio, add up your outstanding debt across all revolving credit accounts. Remember, installment accounts with regular payments, like student loans, don’t count in your credit utilization and shouldn’t be added.
Then, tally your total credit limits across all your credit accounts. The total credit limit is the maximum amount you can charge to the account. Once you have both numbers, divide your debt by your total credit limit and times by 100 to convert it to a percentage. This is your credit utilization ratio.
Credit utilization ratio example
If you owe $500 on a credit card and $1,000 on a personal line of credit, your total debt is $1,500.
If the total credit limit is $2,000 on your credit card and $5,000 on your personal line of credit, you have a total credit limit of $7,000.
Divide those numbers, $1,500 by $7,000, and you get a credit utilization of 21%.
4 tips to improve your credit utilization
Paying down your revolving debt and limiting your spending is the best way to lower your credit utilization ratio. But there are other things you can do to help:
- Report your income. Cards providers are more likely to increase your total credit limit if your income goes up, so be sure to report if it does. Most institutions allow you to do this via their online portals or in-app.
- Ask for an increase. Once you’ve reported your income and your details are up-to-date, request a credit increase from your provider. Most providers allow an increase once every six months. Again, you can usually do this online, but you can also call the number on the back of your card.
- Keep old cards open. You might be tempted to close old cards you no longer use, but this lowers your total credit limit, and increases your credit utilization ratio because you’re reducing your overall credit limit.
- Consider an installment loan. If you have lots of revolving debt with high interest rates, consider consolidating your debt with a low-interest personal loan. This shifts your revolving debt to installment debt, which isn’t counted in your credit utilization.
While important, your credit utilization is only one factor in the amounts owed category. If you’re looking to increase yours, there are many ways to improve your credit score.
A higher credit limit could decrease your credit score
Increasing your total credit limit can lower your credit utilization and have a positive impact on your credit score — but only if you use it wisely. You still need to keep your spending habits the same for your credit utilization to go down.
If you raise your limits and also raise your spending, your credit score may remain the same or decline. If a higher credit limit would be too tempting to overspend, it may be best to focus on paying down existing debt instead.
Also, if you increase your total credit by taking out several new credit cards, your credit score could get dinged with multiple hard credit checks and future lenders may think you’re too desperate for credit.
How long does it take to improve your credit utilization?
It depends. If you increase your credit utilization by paying down debt, your credit score should go up after your next billing cycle. Credit reports usually update once a month or at least every 45 days, according to TransUnion(2).
On your credit report, you might see a Last Updated date next to your credit account. If you made the payment before that date, you should see an increase in your score. If not, you may need to wait another month.
Also, if you increase your credit utilization by increasing your total credit limit, it can take a few billing cycles for your new limits to appear on your credit report.
However, your credit score will only increase if your other financial habits remain healthy. If your score went down even though you improved your credit utilization, consider other reasons your credit score may have dropped.
Related How long does it take to build credit?
Bottom line
Your credit utilization ratio is one of the most important factors in determining your credit score. A credit utilization under 30% can increase your credit score over time and show lenders that you’re a responsible borrower. However, if you’re still struggling to get your credit score up even after lowering your credit utilization, learn other ways you can build your credit.
