Understanding the Credit Utilization Ratio

To the math-challenged among us, a credit utilization ratio might sound daunting, like one of those impossibly difficult abstract number problems that mere mortals will never understand.

So, it’d be nice if ‘credit utilization ratio’ had a simpler name, especially because it really isn’t all that convoluted. It’s just this: the percentage you’re using of your available credit.

Your credit utilization ratio is one of the most important factors in how your credit score is generated, so it’s worth the effort to keep an eye on it.

By the way, here’s who to blame for that moniker: Bill Fair and Earl Isaac. Fair was an engineer and Isaac was a mathematician when they developed and named the credit utilization ratio back in 1956. They probably figured they had to call it something worthy of their high-falutin’ brains, so they stuck us with it. If it helps, you can remember it by its acronym: CUR.

How to Calculate Credit Utilization

Arriving at your credit utilization ratio is a simple process that requires a little basic addition, division, and multiplication. You don’t even need those rudimentary skills if you’ve got a calculator handy to perform the math magic for you.

Let’s say you have a credit card with a $10,000 limit on it; that’s your available credit. You’ve made purchases with it that give you a current balance of $1,000. You determine your CUR (see what we did there?) by dividing your balance by your credit limit: $1,000 ÷ $10,000 = .10 or 10%. That’s your credit utilization ratio. Ta-da!

As it happens, 10% is a damn fine CUR. We’ll explain why a little later.

Many of us, of course, carry more than one credit card, which makes the credit utilization ratio calculation process slightly less straightforward. When you have multiple revolving credit accounts (such as credit cards, personal lines of credit, and home equity lines of credit), the first step is adding up all those balances.

For example, your balance on one credit card is $1,000, but you also owe $1,500 on another one and $2,500 on a third one. You’re using a total of $5,000 of your available credit. Let’s say the limit on that first card is $5,000, but the limits are lower on the other two: $3,000 on each.

The second step, then, is to add up all your credit limits: $5,000 + $3,000 + $3,000, totaling $11,000. Now perform the division step, dividing your total balances by your total credit limit: $5,000 divided by $11,000. That comes to .4545, which, after multiplying it by 100 to get a percentage, gets you a CUR of 45.5%.

And as that happens, 45.5% is NOT a damn fine CUR. We’ll explain that later, too.

You should be aware that credit bureaus use the balances reported by your lenders once a month near the end of the account’s billing cycle, and that once-a-month timing might not reflect your most recent monthly payments or purchases. You can find their CUR calculation by adding up the balances that appear in your credit report and use that number to divide by your total credit limit, which won’t be different. That exercise allows you to measure your current CUR status against what was actually used in the compilation of your credit score. The comparison might help you adjust your spending behavior.

The Role of Credit Utilization in Credit Scoring

Credit utilization is an inescapable ingredient in determining your FICO score, which is an inescapable ingredient in determining your ability to secure credit.

Credit utilization was introduced by Bill Fair and Earl Isaac in 1956, roughly the year when credit cards were emerging on the national scene. Fair and Isaac created a scoring mode that used a number of statistics to predict the risk of granting credit to individual customers.

Credit utilization ratio was one of those stats. It accounts for 30% of your score. If your FICO score is 650 (FICO scores range from 300-850), your credit utilization ratio probably accounts for about 195 of those points.

If your goal is an 800 credit score, which is a worthy endeavor, then a good place to make up the needed difference is your CUR. The only more important factor is your history of paying bills on time, which makes up about 35% of your FICO score.

FICO today is one of two main companies that determine credit scores. The other is VantageScore, which uses the same factors, including the credit utilization ratio, though with slightly different emphases. Your credit utilization ratio, for example, accounts for only up to about 20% of your VantageScore number.

When we explained how to calculate your CUR, we gave you two examples, one involving a single revolving credit account and one involving multiple accounts. They’re both important because the scoring models can factor in both per-card and overall ratios.

In recent years, the use of your credit utilization ratio in your credit score has evolved. FICO and VantageScore have begun tracking trending data to better predict the risk you represent to lenders. The old models essentially used a once-a-month snapshot of your credit utilization ratio to factor into your credit score. The newer versions such as VantageScore 4.0 and FICO 10T now analyze your financial behavior by collecting data points over a period of time to reveal trends that might matter to a company considering offering you credit. If your credit utilization ratio has been dropping or rising over, say, the last two years, that tendency can now be reflected in your credit score.

What Is a “Good” Credit Utilization Ratio?

The best way to make your credit utilization ratio work at bettering your credit score is to keep your CUR under 30%, which is why we mentioned 10% as an excellent CUR in our earlier calculation example. The 30% rule is an informal line of demarcation between a credit utilization ratio that will help or hurt your credit score. Below 30% helps. Above 30% does not help.

The lower your ratio, the higher the chances lenders will trust you with their money. To maximize its positive effect on your credit score and, consequently, your attractiveness to lenders, your credit utilization ratio should be between 1%-10%.

Data from the third quarter of 2024 compiled by Experian, one of the three main credit reporting bureaus along with Equifax and TransUnion, shows a clear correlation between FICO credit scores and credit utilization ratios. The average CUR was 7.1% in U.S. credit scores between 800-850, which are considered to be in the exceptional range. In the poorest score range (300-579) on the 300-850 scale, the average credit utilization ratio was 80.7%.

There is one caveat to reducing your credit utilization ratio, however: You can overdo it. If you bring it all the way down to 0% by simply not using your credit cards at all – not using any of your credit limit, in other words – you aren’t giving FICO and VantageScore the information they need to evaluate your money management and assemble your credit score. It might nudge the needle up on your credit score temporarily, but not using your cards at all means you aren’t building a positive payment history, which – as we mentioned earlier – is a more significant factor in your credit score that your CUR is. Eventually, a 0% credit utilization ratio can hurt your overall credit.

It’s better to use your cards occasionally and keep current with the monthly payments. That is a more certain way to improve your credit score and build credit for your future.

Why a High Utilization Hurts

Any credit utilization ratio over 30% is a red flag warning to a credit card company that you are at risk for default; thus, that 45.5% CUR in the other earlier calculation example is not going to help you secure new credit going forward. A high percentage suggests to lenders that you might be abusing your credit to the point that you are over-extending your finances and are in jeopardy of not being able to make the monthly payments on your balances.

That red flag will lower your credit score, which in turn will cause approval problems if you are trying to acquire new credit. It will also negatively affect the terms you get on whatever new credit you do get. You’ll likely be saddled with a higher interest rate and a lower credit limit than you would with a better credit score built on the back of a low credit utilization ratio.

But there are ramifications to a high CUR beyond the ability to secure future credit at affordable terms. If you run your balances up against your credit limits, meaning your credit utilization ratio is high, the size of your minimum monthly payments will grow. That adds to the likelihood of a downward debt burden spiral that can be difficult to overcome.

It also shrinks your room to maneuver through financial emergencies. The hardship of unexpected expenses or a sudden loss of income will be more painful if you’ve used up most of your available credit.

How to Maintain a Healthy Credit Utilization

Common sense behavior is critical to the health of your personal finances, so some steps to take to keep your CUR low shouldn’t come as a surprise. Others might not be so obvious. Either way, they’ll all help you steer a course to improving your credit score.

Here are tips for managing the fitness of your credit utilization ratio.

• Stay up to date with your credit account payments. Make them regularly and even early (before the billing cycle ends) whenever possible and pay more than the minimum balance when you can.
• Look for ways to increase your credit limits. In many cases, a simple request to the credit card company will work. But you can also increase your overall limit by acquiring a new card.
• Avoid additional expenses. Don’t undo the value of those higher credit limits by increasing your spending, too.
• Keep old credit accounts open, even if you’ve stopped using them. They’ll still count toward your overall credit limit, which will help your utilization ratio.
• Free up the available credit on other cards by using balance transfer offers. This move comes with a bonus beyond increasing your accessible credit. A balance transfer card’s low interest rate will also help you cut into your debt if you use it wisely.
• Regularly monitor your credit reports. You can get free weekly reports from each of the three major credit bureaus – Experian, TransUnion, and Equifax – by signing up at AnnualCreditReport.com. Those reports might not include your credit scores, but you can usually get them through free accounts with the individual credit bureaus.

Common Myths About Credit Utilization

Credit, and the debt it spawns, can be complicated, and the twists and turns of the credit utilization ratio don’t exactly help people embrace it from the jump. There are some misconceptions about how CUR works and how to improve it. We’ll take a look at them next.

Misconception: 0% Utilization is Best

We addressed this a little earlier, but it bears repeating. Don’t fall for the myth that simply not carrying any balances whatsoever on your cards will beef up your credit score. One of the ways to build positive credit is to have a reliable history of making payments, which you can only demonstrate by actually using your credit. If you don’t use it at all over an extended time period, the card companies might close your accounts. So, while a low CUR (1%-10%) should be the goal, a 0% credit utilization ratio could actually damage your credit score.

Misconception: Closing Cards Improves Credit

Again, we mentioned this one already. It sounds counter-intuitive because closing an account relieves you of its debt, but optimizing your credit utilization ratio doesn’t work that way. Yes, eliminating that account’s debt will help, but you don’t want to eliminate the credit limit that came with the account, too. Keeping the account open and not using it will increase the distance between your balances and your limits, which is how to lower your CUR.

Misconception: Applying for More Credit Always Lowers Utilization

This is a partial myth, because adding the credit limits from new accounts can in fact lower your overall credit utilization ratio if you’re careful about reining in the balances. But the key word here is “always,” which doesn’t apply. Applications for new credit accounts can have a negative impact, at least temporarily, on your credit score because they can trigger reviews of your credit report (called hard inquiries) by the card companies weighing the merits of your new credit requests. Multiple hard inquiries appearing on your credit report can be a sign that you’re trying to take on a lot of new debt, which can briefly lower rather than raise your credit score regardless of what your CUR is. The lesson: Be judicious about applying for more credit.

Misconception: High Utilization for a Short Time Won’t Hurt

This, too, isn’t always a fallacy because it’s true that the damage a spike in your credit utilization ratio won’t last if you’re quick about paying down the balance (or balances) that caused the increase. Your credit score can recover from a CUR gain on a month-to-month basis since the traditional scoring models only factor it in every 30 days or so. But it’s also true that the newer scoring models (FICO 10T and VantageScore 4.0), which look at longer-term trends in your credit utilization ratio, could reduce your credit score when they detect consistent spikes over time, even when those spikes are ameliorated by frequent payments.

Credit Utilization Ratio and You

Still confused? Stick to it. Getting to your credit utilization ratio is an easy calculation even if it sounds formidable. You shouldn’t let the math (or the name Fair and Isaac gave it!) stop you. Remember, your CUR is one of the main factors in the strength of your credit score and, consequently, the way lenders assess your creditworthiness. It’s worth your attention.

All it takes is some proactive behavior with your personal finances. Monitor your balances. Make your monthly payments, early if possible. And keep your credit lines open even if you aren’t using them.

That’s do-able, right? Next to a mental rasslin’ match with the Navier-Stokes Existence and Smoothness Problem, your proficiency with the credit utilization ratio should be as simple as one (addition), two (division) and three (multiplication). You can do this!