Credit utilization is the percentage of your available revolving credit that is currently being used. It is generally calculated by dividing your credit-card balances by your credit limits. Credit utilization can be an important factor in many credit scoring models, so keeping balances manageable can help you maintain a healthier credit profile.
What Is Credit Utilization?
Credit utilization is the relationship between the balances on your revolving credit accounts and the credit limits available on those accounts.
Credit cards are the most common example. If a card has a $5,000 credit limit and a $1,000 balance, you are using 20% of that card's available credit.
Credit utilization can be considered at both the individual-account level and across your revolving accounts overall. Depending on the credit scoring model, information about individual cards and your overall revolving utilization may both be relevant.
How to Calculate Credit Utilization
The basic calculation is straightforward. Divide your revolving credit balance by the total available credit limit, then multiply by 100.
Example: One credit card
Suppose your credit card has a $5,000 limit and your reported balance is $1,500.
What Is Overall Credit Utilization?
If you have multiple credit cards, you can calculate an overall utilization ratio by adding the balances and credit limits across your revolving accounts.
Example: Multiple credit cards
| Account | Balance | Limit |
|---|---|---|
| Card A | $800 | $4,000 |
| Card B | $600 | $3,000 |
| Card C | $100 | $3,000 |
| Total | $1,500 | $10,000 |
The overall utilization in this example is $1,500 ÷ $10,000 × 100 = 15%.
Why Does Credit Utilization Matter?
Credit utilization is one of the factors considered by many credit scoring models. In general, a lower utilization ratio can be associated with lower perceived reliance on revolving credit.
However, there is no single utilization percentage that guarantees a particular credit score. Credit scoring models can use different formulas, and your score is also influenced by other information in your credit report.
Overall utilization
The relationship between your total revolving balances and total revolving credit limits can affect scoring calculations.
Individual card utilization
A single card with a high balance relative to its limit can produce high utilization even when your overall ratio is lower.
Is 30% Credit Utilization the Ideal?
You may have heard that you should keep your credit utilization below 30%. This is commonly repeated personal-finance guidance, but it should not be treated as a universal cutoff or a guaranteed credit-score threshold.
Credit scoring models can respond to utilization in different ways. In general, lower revolving utilization is often viewed more favorably by scoring models than high utilization, all else being equal.
Low utilization
Represents relatively little of the available revolving credit being used.
Common benchmark
Often discussed as a target, but it is not a universal scoring threshold.
High utilization
A large portion of available revolving credit is being used.
You do not need to carry a credit-card balance or pay interest just to build credit. Paying your statement balance in full by the due date can help you avoid interest on purchases when your card's terms provide a grace period.
Individual vs. Overall Credit Utilization
Your overall ratio can sometimes hide a high balance on one particular card.
For example, imagine you have two cards:
| Card | Balance | Limit | Utilization |
|---|---|---|---|
| Card A | $2,400 | $3,000 | 80% |
| Card B | $0 | $7,000 | 0% |
| Total | $2,400 | $10,000 | 24% |
The overall utilization is 24%, but Card A itself is using 80% of its available limit. This illustrates why looking only at the overall percentage may not tell the entire story.
Which Credit Card Balance Is Used?
Your credit-card balance can change throughout the month. The amount a card issuer reports to a credit bureau may therefore differ from the balance you see at another point in the billing cycle.
Many issuers report account information periodically, often around the statement cycle, but reporting practices can vary. Because of this, paying your balance before the statement closes may sometimes result in a lower reported balance than waiting until the payment due date.
The exact timing depends on the issuer and account. You should not assume that every lender reports on the same date.
How to Lower Your Credit Utilization
If your revolving balances are high relative to your limits, several practical strategies can reduce utilization.
1. Pay down credit-card balances
Paying down revolving debt directly reduces the numerator in the utilization calculation. If possible, prioritize reducing high-interest credit-card debt while continuing to make at least the required minimum payments on all accounts.
2. Make payments before the statement closes
If your issuer reports the statement balance, making an additional payment before the statement closing date may reduce the balance that gets reported. Confirm your issuer's reporting practices before relying on this strategy.
3. Avoid unnecessary new charges
Paying down a balance while continuing to add large purchases can keep utilization high. A sustainable spending plan can make it easier to keep balances manageable.
4. Request a higher credit limit carefully
A higher credit limit can reduce utilization if your balance stays the same. For example, a $1,000 balance on a $5,000 limit is 20%, while the same balance on a $10,000 limit is 10%.
However, a credit-limit increase is not guaranteed, and the issuer may review your credit profile. Ask about the issuer's process before requesting one.
5. Do not close cards solely to simplify your wallet
Closing a credit card can reduce your total available revolving credit. If balances remain unchanged, that can increase your overall utilization ratio.
Whether to close an unused card depends on the broader situation, including fees, spending habits, account age, and your ability to manage the account safely.
Example: How Paying Down a Balance Changes Utilization
Suppose a card has a $5,000 credit limit and a $3,000 balance.
| Balance | Credit Limit | Utilization |
|---|---|---|
| $3,000 | $5,000 | 60% |
| $2,000 | $5,000 | 40% |
| $1,500 | $5,000 | 30% |
| $1,000 | $5,000 | 20% |
The credit limit did not change in this example. Paying down the balance alone reduced the utilization percentage.
How Credit Utilization Can Affect Your Credit Score
Credit utilization is one component of the information used by many credit scoring systems. Because scoring models differ, the exact effect of a particular utilization percentage can vary.
A high utilization ratio can matter especially when compared with your previous reported balances. Your credit score can change as updated account information reaches the credit bureaus.
Importantly, utilization is only one part of your credit profile. Payment history, length of credit history, types of credit, new credit, and other information can also matter depending on the scoring model.
What If Your Credit Utilization Is Temporarily High?
A temporarily high balance does not necessarily mean your credit profile is permanently damaged.
For example, you might use a card for a large purchase, an emergency expense, or travel and then pay the balance down later. If the reported balance decreases, the utilization information used by a scoring model can also change.
This is one reason credit scores can move from month to month even when you have not missed a payment.
A lower utilization ratio is not a reason to take on additional debt you cannot comfortably repay. Paying expensive revolving debt down can be more important to your finances than trying to reach a particular utilization percentage.
Can Increasing Your Credit Limit Lower Utilization?
Yes, mathematically, a higher credit limit can lower your utilization if your balance remains unchanged.
Example
| Scenario | Balance | Limit | Utilization |
|---|---|---|---|
| Before increase | $1,500 | $5,000 | 30% |
| After increase | $1,500 | $7,500 | 20% |
But a larger limit should not be treated as additional income. Spending more simply because you have more available credit can increase debt and interest costs.
Common Credit Utilization Mistakes
Carrying a balance to build credit
You generally do not need to carry debt and pay interest just to demonstrate credit usage.
Focusing only on 30%
Treating 30% as a universal scoring cutoff oversimplifies how different credit models work.
Ignoring individual cards
Your overall utilization can look moderate while one card is carrying a very high balance.
Closing cards without considering the effect
Closing a card can reduce your available credit and potentially increase overall utilization.
Credit Utilization Checklist
Credit Utilization FAQs
What is a good credit utilization ratio?
Lower utilization is generally viewed more favorably by many credit scoring models than high utilization. There is no single percentage that guarantees a particular credit score.
Is 30% credit utilization good?
A 30% ratio is commonly used as a personal finance benchmark, but it is not a universal cutoff used by every credit scoring model.
Does paying off my credit card lower utilization?
Yes. If your balance decreases while the credit limit stays the same, the utilization percentage decreases mathematically.
Does credit utilization reset every month?
Credit-card balances can change throughout the month, and issuers report account information periodically. The reported balance can therefore change from one reporting period to another.
Does having a $0 balance hurt your credit?
Having a $0 credit-card balance does not by itself mean you are failing to build credit. You generally do not need to carry a balance and pay interest to establish responsible credit use.
Can closing a credit card increase utilization?
It can. Closing an account may reduce your total available revolving credit. If your balances remain the same, your overall utilization ratio can increase.
Does credit utilization affect every credit score?
Credit scoring models differ. Utilization of revolving credit is important in many commonly used scoring models, but the exact calculation and impact can vary by model and credit profile.
Do I need to pay my card before the due date?
You should make at least the required minimum payment by the due date to avoid being late. Paying earlier can also reduce your balance before a statement or reporting date, depending on the issuer's practices.
Want to understand your overall finances?
Credit utilization is only one part of your financial picture. Use PaycheckMint's calculators and guides to understand income, taxes, budgeting, debt, and other personal-finance topics.
Explore Personal Finance