Credit Utilization: How Much Credit Should You Use?

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Nearly 200 million Americans have at least one credit card and nearly 75% of households have a credit card or personal loan. Millions more possess other debts, such as home equity lines of credit.

The amount of revolving credit that you have, also known as your credit utilization ratio, does more than just track outstanding debts — it also factors into your credit score.

Let’s define what makes a good credit utilization ratio, which ratios are considered good, and how you can improve your credit utilization ratio no matter your unique financial situation.

What is a credit utilization ratio?

Whether you’re applying for a credit card or taking out a home equity line of credit, you’re given a limit of how much you can borrow. For instance, a credit card could have a spending limit lower than $1,000 or higher than $10,000, depending on credit approval.

A credit utilization ratio is the amount of revolving credit you’re using divided by your credit limit, displayed as a percentage. For example, a person using $500 of their $1,000 credit card will have a 50% credit utilization ratio, while someone using $2,500 of their $10,000 credit limit will have a 25% credit utilization ratio.

Credit utilization ratios only apply to certain forms of revolving credit. Two common types are credit cards and home equity lines of credit (HELOCs). Debts like mortgages and student loans, however, aren’t revolving credit accounts and don’t impact your credit utilization ratio.

How your credit utilization ratio affects your credit score

Credit scores range from 300 to 850 on the FICO model, but can range as high as 900 or 950 on other models. These scores take into account specific financial factors, including your unpaid debts and credit utilization ratio. Although the scoring model and the institution evaluating your credit may score you differently, your credit utilization ratio is always a factor.

Because credit utilization ratios make one of the highest impacts (up to 30%) on your credit report, it’s important to have a good ratio for as high of a credit score as possible.

Keep in mind: While credit utilization ratio only impacts your credit score, your credit score itself can influence other aspects of your lifestyle. A higher credit score has many benefits, such as potentially making it easier to qualify for loans, lower your insurance rates, and even rent an apartment.

Of course, having a good credit utilization ratio isn’t the only part of your financial health that matters. Ideally, you’ll want to maintain a good credit utilization ratio while also proactively strengthening your overall credit report by continuing to pay down your debts and paying your bills on time.

What is a good credit utilization ratio?

Credit utilization ratios are one of many tools that lenders use to assess how responsibly you manage your debts. Generally, lenders prefer to see a credit utilization ratio of 30% or lower. This percentage represents the total revolving credit you have available to you, rather than just your utilization for each individual line of credit. When you exceed 30% of your available credit, lenders might assume that it may be difficult for you to repay that debt.

For example: If you have a credit card with a $1,000 borrowing limit, many lenders and credit scorers will prefer that you only utilize $300 or fewer each month. That’s also assuming that you’re repaying your outstanding balance by the end of each billing cycle.

The lower you keep your credit utilization ratio, the more likely it is that you’ll improve your credit score. However, it’s entirely possible to responsibly utilize more than 30% of your available credit and still have a credit report that lenders may consider favorable. Keep in mind, though, that a higher credit utilization ratio may affect the financing terms you get.

How to calculate your credit utilization ratio

Along with repaying your balance in full each month, it’s also a good idea to know how much of your available credit you’re using at the end of each billing cycle. Here’s how you calculate your credit utilization ratio:

  1. Make a list of all of your revolving credit accounts, including active credit cards with $0 balances.
  2. Add up all of the outstanding debt across all accounts.
  3. Divide that number by the total amount of available credit across those accounts.
  4. Convert this number to a percentage to see the credit utilization ratio.
For example: Let’s say that you have three revolving credit accounts:

  • Account 1: A $50,000 HELOC that you’ve borrowed $10,000 from
  • Account 2: Credit card with a $10,000 limit and a $1,000 balance
  • Account 3: Credit card with a $10,000 limit and a $0 balance

Your total outstanding debt, $20,000, divided by your total available credit of $70,000, equals 0.29, or 29%. Many lenders will consider this a good credit utilization ratio.

If math isn’t your strong suit, there are plenty of free resources that you can use, such as the credit utilization calculator available from Omni Calculator.

How to improve your credit utilization ratio

There are multiple ways for you to improve your credit utilization ratio, including:

  • Increase your credit limit. The goal here is to build better credit. By opening a new card or increasing your limit on an existing card through your issuer’s approval, you’ll increase your available credit. This increased limit shows your ability to use your debt responsibly.
  • Use your credit card less. Conversely, if you don’t want to take on more potential risk with a higher credit limit, you can lower your current account balances. Doing so will decrease your utilization ratio and prevent a hard credit pull for requesting to increase your credit limit.
  • Pay your monthly bill early. By paying your credit card bill prior to the end of the statement period, your credit card issuer may report a lower balance to the credit bureaus.
  • Consolidate your debts with a personal loan. By moving debt from a revolving credit account like a credit card to a personal loan, you’ll minimize how much of your debt is included in your credit utilization ratio.

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About the author
Nick Dauk

Nick Dauk is a Credible authority on personal finance. His work has been featured in Business Insider, The Edge, Bisnow, The Telegraph, BBC, and Culture Trip.

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