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How Long Will a High Credit Utilization Ratio Hurt My Score?

Credit Score, Personal Finance
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How Long Will a High Credit Utilization Ratio Hurt My Score?

Your credit utilization ratio is the amount of credit you use as compared to your credit card limits.

Say you have a card with a $10,000 limit and your balance on it is $5,000. Your credit utilization ratio would be 50%.

It’s important to keep your credit utilization ratio below 30% — both on individual cards and across all your cards — because it heavily influences the portion of your credit score determined by amounts owed. In both the widely used FICO scoring model and its competitor, VantageScore, this accounts for about one-third of your overall score. So, carrying a high balance on your cards at any point during the month has the potential to damage your credit.

After timely payments, no factor influences your score more than how much of your available credit you are using. Those late payments can haunt you for a very long time. But if you’ve been carrying a high balance, once you’ve paid it off, it won’t continue to affect your score after your credit report updates and the new data is used to calculate your credit score.

How credit scores are calculated

Every month, the balance on your credit cards is reported to each of the three major credit bureaus by your issuers. This data then lands on your credit reports. When a new credit card balance report comes in, it replaces the information from the previous month.

This is how the changing information on your credit report can make your credit score fluctuate: Let’s say you have a credit card with a limit of $5,000. In one month you charge a new washer and dryer ($1,200) and have to pay for car repairs ($800). If you charged nothing else on that card, you’d have a balance of $2,000 on a limit of $5,000 — that’s a credit utilization of 40%, higher than experts recommend.

Now let’s say you have an emergency fund, and you pay that bill off at the end of the month and use your card normally the next month, charging about $500. Your credit utilization will drop to 10% ($500 against a $5,000 limit), well under the recommended maximum.

Scores are calculated only on an as-requested basis. Let’s say your card issuer reported data after you made the big charges but before you paid them off. You could see a big drop in your score. But if your score was calculated after the big bills were paid off, your score wouldn’t suffer.

So a high credit utilization ratio one month doesn’t necessarily spell disaster for your score in the long run.

Tips for taming your credit utilization ratio

Although carrying a high balance on a credit card for a short period of time doesn’t do long-term damage to your score, it’s still important to keep your credit utilization ratio low.

Here are a few tips for keeping your credit utilization ratio under control:

  • Check balances on your credit cards regularly. If any start to creep above the 30% threshold, make a payment. (You can set up alerts to let you know when this happens.)
  • Spread your spending among several cards to keep the utilization low on each.
  • Think twice about signing up for retail store credit cards. Since they typically have very low credit limits, just one shopping spree could really push up your utilization.
  • Request an increase on your credit limit; a higher limit paired with the same balance means instantly lower utilization.  The trick, of course, is not letting the balance creep up just because the limit went up.

Interested to see how a credit limit increase might affect your score? As part of NerdWallet’s free credit score tool, you can use the credit score simulator to estimate the effect of various actions, such as getting a higher limit:

Updated Nov. 16, 2016.