Sandra MacGregor
Janine DeVault
Beth Buczynski
Credit utilization — the amount of available credit you’re using — is an important factor credit bureaus use to calculate your credit score. Knowing how to maintain this key credit score metric can help you gain more control over your creditworthiness.
What is credit utilization?
Credit utilization is a term lenders and credit bureaus use to describe the portion of revolving credit you’re using versus how much you could be using at any one time.
If credit were lemonade, credit utilization would be the amount of lemonade in your glass versus the total amount of liquid the glass can hold.
Nerdy Tip: Revolving credit includes things like credit cards and lines of credit, generally any kind of credit where you can borrow, repay, and then borrow more funds up to the permitted credit limit.
How to calculate your credit utilization ratio
The formula for calculating credit utilization ratio is as follows:
Credit Utilization Ratio = (Total Outstanding Credit Card Balances / Total Available Credit Limit) × 100
To calculate your credit utilization ratio (also known as debt to credit ratio):
- Start by adding up all the revolving debt you currently have — in other words, the total unpaid balances on all your credit cards, bank loans and lines of credit.
- Next, divide that number by the sum of all your credit limits (i.e., the total amount of revolving credit available to you).
- Then, multiply that number by 100 to get a percentage. This is your credit utilization ratio.
So, for example, if your total outstanding balances equal $30,000, and your total credit limits add up to $100,000, your credit utilization ratio is 30% ($30,000 ÷ $100,000 x 100).
While the above example provides the overall credit utilization ratio for all your accounts, you can also calculate the ratio for every individual revolving credit account by following the same formula.
Whether you do a per-card or overall calculation, you want to keep your ratio as low as possible. Creditors like to see that you can manage credit responsibly and make timely payments.
Maintaining a low debt-to-credit ratio tells lenders you’re not relying too heavily on your available credit.
Nerdy Tip: Credit bureaus may have a harder time gauging whether you’re a worthwhile risk if you don’t use any of your credit. So, it’s important to use some of your credit, but always pay it off in a timely fashion — don’t carry large balances month-to-month.
How credit utilization affects your credit score
If you’re wondering why you should even bother calculating your credit utilization ratio, it’s because this metric has a huge impact on your credit score.
Credit scores are based on five main factors: your payment history, credit utilization ratio, credit history, credit mix and/or credit data from public records and account inquiries. Credit utilization is the second most important factor, accounting for about 30% of your score.
Why is credit utilization so important to potential creditors? In short, if you’re using too much of your available credit, it’s taken as a sign that you could be having financial difficulties and can’t pay off your balances. As such, financial experts recommend that you try not to exceed a credit utilization ratio of about 30%. A lower your credit utilization ratio shows potential creditors that you’re not overextended.
How to manage your credit utilization
Since credit utilization accounts can have such a significant impact on your credit score, it’s wise to keep your ratio as far below 30% as possible.
Here are some ways to ensure your credit utilization stays at a healthy ratio and doesn’t damage your credit score.
- Monitor credit limits. Pay attention to each account’s credit limit to avoid going above a ratio of 30% for any individual credit card or credit account.
- Pay off balances in full. Making more than the minimum payment will minimize the high-interest debt you carry and guarantee you’re not eating into too much of your available credit. The closer you get to your credit limits, the more likely you are to increase your credit utilization ratio.
- Increase your credit limit. If you have only a couple of credit accounts and each has a low credit limit, it can be hard to keep your credit utilization in check, even with responsible spending. Asking for a credit limit increase can give you more breathing room and make it easier to stay below 30%. Just be careful not to let those higher limits compel you to spend more, as doing so would cancel out the benefits.
- Apply for a new credit product. Another way to increase your available credit is to apply for an entirely new credit card. But don’t apply for too many new credit products because frequent credit inquiries can negatively affect your credit score.
Frequently asked questions about credit utilization
A good rule of thumb is not to exceed 30% of your total available credit. However, this may not always be possible. Using a larger portion of your credit may negatively affect your score, but you’ll typically see your score go up once you pay your credit down again.
The utilization rate of a credit card refers to the portion of debt you’re carrying versus the amount of credit available to you. A simple calculation is to divide the balance owed on your card by your total credit limit and then multiply that number by 100.
DIVE EVEN DEEPER
How to Check Your Credit Score in Canada
You can check your credit report for free by contacting Canada’s two main credit bureaus, Equifax and TransUnion. Your credit score isn’t always included in your report and may require paying a fee.
What to Know About Your Credit Card Limit
“Good” credit limits vary. How you manage them do not — don’t go over the limit, keep your credit utilization ratio low and maintain a good credit history in case you want to increase your credit limit.
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