{"id":378,"date":"2021-06-29T21:13:49","date_gmt":"2021-06-30T04:13:49","guid":{"rendered":"https:\/\/www.nerdwallet.com\/ca\/?page_id=378"},"modified":"2024-07-09T08:18:58","modified_gmt":"2024-07-09T15:18:58","slug":"what-is-credit-utilization","status":"publish","type":"page","link":"https:\/\/www.nerdwallet.com\/ca\/personal-finance\/what-is-credit-utilization","title":{"rendered":"Credit Utilization: How to Maintain an Ideal Ratio"},"content":{"rendered":"\n

Credit utilization \u2014 the amount of available credit you’re using \u2014 is an important factor credit bureaus use to calculate your credit score<\/a>. Knowing how to maintain this key credit score metric can help you gain more control over your creditworthiness.<\/p>\n\n\n\n

What is credit utilization<\/strong>?<\/h2>\n\n\n\n

Credit utilization is a term lenders and credit bureaus use to describe the portion of revolving credit you\u2019re using versus how much you could<\/em> be using at any one time. <\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Nerdy Tip:<\/strong> Revolving credit includes things like credit cards and lines of credit<\/a>, generally any kind of credit where you can borrow, repay, and then borrow more funds up to the permitted credit limit.<\/p>\n\n\n\n

How to calculate your credit utilization ratio<\/strong><\/h2>\n\n\n\n

The formula for calculating credit utilization ratio is as follows:

Credit Utilization Ratio = (Total Outstanding Credit Card Balances \/ Total Available Credit Limit) \u00d7 100<\/strong><\/p>\n\n\n\n

To calculate your credit utilization ratio (also known as debt to credit ratio):<\/p>\n\n\n\n

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  1. Start by adding up all the revolving debt<\/a> you currently have \u2014 in other words, the total unpaid balances on all your credit cards, bank loans <\/a>and lines of credit. <\/li>\n\n\n\n
  2. Next, divide that number by the sum of all your credit limits<\/a> (i.e., the total amount of revolving credit available to you). <\/li>\n\n\n\n
  3. Then, multiply that number by 100 to get a percentage. This is your credit utilization ratio.<\/li>\n<\/ol>\n\n\n\n

    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 \u00f7 $100,000 x 100).<\/p>\n\n\n\n

    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.<\/p>\n\n\n\n

    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. <\/p>\n\n\n\n

    Maintaining a low debt-to-credit ratio tells lenders you\u2019re not relying too heavily on your available credit. <\/p>\n\n\n\n

    Nerdy Tip: <\/strong>Credit bureaus may have a harder time gauging whether you\u2019re 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 \u2014 don’t carry large balances month-to-month. <\/p>\n\n\n\n

    How credit utilization affects your credit score<\/strong><\/h2>\n\n\n\n

    If you\u2019re wondering why you should even bother calculating your credit utilization ratio, it\u2019s because this metric has a huge impact on your credit score<\/a>.<\/p>\n\n\n\n

    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<\/a>. Credit utilization is the second most important factor, accounting for about 30% of your score.<\/p>\n\n\n\n

    Why is credit utilization so important to potential creditors? In short, if you\u2019re using too much of your available credit, it\u2019s taken as a sign that you could be having financial difficulties and can\u2019t 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\u2019re not overextended.<\/p>\n\n\n\n

    How to manage your credit utilization<\/strong><\/h2>\n\n\n\n

    Since credit utilization accounts can have such a significant impact on your credit score, it\u2019s wise to keep your ratio as far below 30% as possible. <\/p>\n\n\n\n

    Here are some ways  to ensure your credit utilization stays at a healthy ratio and doesn\u2019t damage your credit score.<\/p>\n\n\n\n