Your credit utilization rate, or credit utilization ratio, is a number calculated by dividing the total amount of revolving credit you’re using by how much credit you have available. Many consumers don’t fully understand the concept of revolving credit. To better explain, it is an amount that essentially “revolves” over time. It has no start or end date. This is an important factor in your credit score (about 30%), though slightly less so than paying your bills on time; payment history makes up 35% of your FICO score.
How Is Credit Utilization Calculated?
To calculate your credit utilization, first add up all the credit card balances you currently have. Then add up the limits on all your cards. Divide the total balance by your total credit limit, and then multiply the number you get by 100. This will provide the ratio as a percentage.
For example, you have two credit cards with a total available amount of $10,000. There is a $5,000 balance on one card. In this case, your credit utilization is 50%, meaning you are using half of your available credit.
To track utilization on a per-card basis, calculate your per-card ratio in the same way, except the calculation will determine how much you’re utilizing on one line of credit. As you track different cards, you’ll have different utilization rates for each one. And, as you make payments and purchases over time, the ratio will go up or down accordingly.
Why Credit Utilization Is Important
Credit reporting agencies track utilization to calculate your creditworthiness. The lower your utilization rate, the less available credit you are using, which is good for your credit score. Based on historical data, people with higher utilization ratios are more likely to default on their credit payments. But you can manage each credit balance by not overspending or using credit for unnecessary purchases or daily expenses.
Managing each credit account is important. It’s also useful to track your debt-to-income ratio, which compares what you owe to how much you earn. While credit bureaus don’t track income data, credit card limits are based on the income you report to creditors. Credit limits are usually determined by your declared monthly income. Scoring models assume that credit limits are usually higher than your gross monthly income, so high utilization will likely leave you deeper in debt.
Therefore, lowering your credit utilization rate can help improve your credit score.
What Is a Good Credit Utilization Rate?
Credit bureaus generally recommend keeping your utilization rate below 30%. The lower the percentage, the more it shows you are managing your credit. Below 10% is more optimal. However, 0% utilization isn’t beneficial because creditors can’t determine your level of risk as a borrower. It can also help to spread charges over different cards, as you are likely to use less available credit on a single card. However, the scoring model used impacts how effective this strategy is.
Ways to Improve Your Credit Utilization Rate
The best way to have a good credit utilization rate is to pay your balances in full every month. If it isn’t possible to get to zero:
- Keep balances as low as you can.
- Pay cards twice a month.
- Request a credit limit increase.
- Open a new credit account.
- Keep unused credit accounts open.
Contact American Credit
If negative or erroneous information on your credit report, in addition to a high credit utilization rate, is affecting your credit score, contact American Credit. We provide credit repair, restoration, and consultation services to customers in Los Angeles, Santa Monica, and throughout Southern California. Once we analyze your situation, we use a pre-litigation process that is more effective than dispute resolution. To learn more about our credit repair service and request a free Credit Repair Consultation, call 855-621-9297 today!