Your credit utilization ratio is a measure of how much you owe on all your revolving accounts, such as credit cards, compared with your total available credit — expressed as a percentage.
Here’s how it’s calculated:
Credit utilization ratio = (Total balances on all credit cards / Total of credit limits on all cards) X 100
This number is important because it tells credit scoring companies how much of your available credit you are using. Both FICO (the credit score used in most lending decisions) and VantageScore (its main competitor) heavily weight credit utilization while calculating scores.
Charging too much on your cards (especially if you max them out) is associated with being a higher credit risk. That’s why running up your cards will lower your score. A low credit score will make it harder for you to qualify for the best rates on loans, insurance policies and other financial products.
Calculate your credit utilization ratio
There are two types of credit utilization ratios: Per-card and overall.
Per-card utilization measures how much of each card’s credit limit you’re using, while overall utilization takes all your cards and their limits into account.
Enter the balance and credit limit for up to three cards in this calculator to see your per-card and overall utilization figures:
Per-card vs. overall — which is more important?
Both per card and overall utilization rates are important. Credit scores can take the ratio into account in both ways — for each card and overall.
Scores can take credit utilization ratios into account both for each card and overall.
Why that’s important to know: If you try to counteract the negative effects of a maxed-out credit card by opening a new card and keeping its balance at $0, the high utilization ratio on the maxed-out card still may hurt your score.
Most experts say you shouldn’t use more than 30% of your credit limit on any one card. That way, the overall usage takes care of itself.
There are strategies you can use to tame your credit utilization and make sure it stays below the recommended amount. The less of your available credit you use, the better it is for your credit score.