The role of credit utilization in credit scores: Why what you owe matters

Improving your credit scores can take a long time, especially if you have negative marks in your credit history that will stay on your credit reports for years. However, your credit utilization ratio is an important scoring factor defined by how much of your credit you’re using each month compared to your credit limits. 

Many credit scores only consider your most recently reported numbers, and lowering your credit utilization can be one of the fastest ways to raise your credit scores. 

What is credit utilization?

Credit utilization, or your credit utilization ratio, is a comparison of the balance and credit limits on your revolving credit accounts, such as your credit cards, shown as a percentage. The numbers for the calculation come from your credit report.

Credit utilization is part of the “amounts owed” category for FICO scores, which makes up about 30% of an average consumer’s FICO score. Other factors include how much you owe overall, your balances on different types of accounts and how many accounts you have with a balance.

Paying down balances on your installment accounts — such as auto, student, and home loans — can help your credit scores, but do not factor into your utilization ratio.. Your overall utilization ratio (the sum of your balances divided by the sum of your credit limits) and the credit utilization ratio of your individual accounts are the important scoring factors. 

Not all credit scores are created equally: Here’s the difference between a FICO score and a VantageScore.

How to calculate your credit utilization ratio

You can calculate your credit utilization ratio by getting a copy of your credit reports and comparing account balances and credit limits. 

For example, if you have a credit card with a $10,000 credit limit and a $5,000 balance, the utilization ratio on that card will be 50%. If you have two cards with $10,000 limits and one has a $5,000 balance, your overall utilization ratio is 25%.

Some apps that give you access to your credit reports will calculate the utilization ratios of your revolving accounts and your overall utilization ratio. But one important and often confusing part of the calculation is that credit scores only consider what’s on your credit reports, which doesn’t necessarily reflect your current account balances.

Credit cards have a billing cycle, which is about 30 days. At the end, all your transactions are added together and you’re sent a statement with the bill for the balance, which will often be due about 21 days later. Many credit card issuers also send an update to the credit bureaus around the end of each billing cycle with your cards’ current balances and credit limits.

As a result, even if you pay your bill in full each month, your credit reports will still show credit card balances. And if you generally use a large portion of your cards’ credit limits, you might even have a high utilization ratio that’s hurting your credit scores. 

What is a good credit utilization ratio?

A good utilization ratio is a low utilization ratio. Some people suggest a specific number, such as keeping your overall utilization ratio below 30% or 10%. These can be helpful reminders or rules of thumb, but there’s no specific point where your utilization goes from good to bad. Like with every scoring factor, the impact of changing your utilization will depend on the entirety of what’s in your credit reports. 

However, in general, it’s best to try to keep your credit utilization as low as possible but above zero. (FICO data scientists have found that someone who has 0% utilization is actually slightly riskier than someone with low utilization.) For example, people who had an 850 FICO Score in April 2019 — the highest score possible — had an average utilization ratio of 4.1%.

As of April 2022, the average utilization ratio across the country was just a little over 31%, and the average FICO score was 716. But 15% of people had a much higher 70% utilization ratio — they could likely improve their credit scores by paying down their balances. 

Tips for lowering your credit utilization

Your credit utilization ratio depends entirely on your revolving credit balances and limits, so anything you can do to change one of these numbers can impact your utilization ratio. Here are basic ways to lower your credit utilization ratio and potentially improve your credit scores:

1. Make early credit card payments: If you’re already paying your credit card bill in full each month, pay down the balance before the end of your billing cycle. One way to do this is to pay your cards down every couple of weeks. Your credit card issuer will then report the lower current balance to the credit bureaus, and that balance will wind up on your credit reports. 
2. Pay down credit card balances: Focus on paying down revolving credit balances as quickly as possible. As an added incentive, paying down high-interest credit card debt can also save you money in the long run. 
3. Try to increase your credit limits: Ask your credit card issuers for a credit limit increase, which gives you more available credit. You might be more likely to get an increase if you’ve made your payments on time and your income or credit score have improved since you opened the card. But fair warning, the request could lead to a hard inquiry, which might hurt your credit scores a little. 
4. Open new credit cards: Although applying for and opening a new credit card might hurt your credit in some ways, such as lowering the average age of your credit accounts, it will also add to your available credit and lower your overall utilization ratio.
5. Don’t close old credit cards: Rather than closing credit cards that you rarely use, keeping the card open can also leave you with more available credit, which makes it easier to maintain a low utilization ratio. (However, if the card has an annual fee or is otherwise troublesome to keep open, consider closing it. Banks have also been known to close credit cards on customers who rarely or never use them).

You also may be able to lower your utilization ratio by using an installment loan, such as a personal loan, to pay off your credit card balances. Commonly called debt consolidation, the approach might help you save money if you can also get a loan that has a lower interest rate than your credit cards.