Credit Utilization Ratio Facts You Need To Know: How Can It Help Your Credit?

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If you want to rebuild or achieve a high credit score, you should learn how to keep your credit utilization ratio low. It’s not a hard task to do but first, make sure you completely understand:

What is the credit utilization ratio and how it can help you with your credit score?

Your credit utilization ratio (or rate) is a number expressed as a percentage that indicates how much revolving credit you owe divided by your total available credit (your maximum credit limit). If your credit limit is $1,000 and you owe $200, your credit utilization ratio would be 20%. The credit utilization ratio is the second most important credit scoring factor after payment history. Thus, it directly affects your credit score.

You need to keep this rate below 30% to have a good impact on your credit score. It is even more helpful if you can keep it under 10%. Otherwise, you send a negative signal on your credit score and reports if you utilize more than 30% of your available credit.

How can you improve your credit utilization ratio?

To improve your credit utilization rate, you’ll need either to reduce the amount you owe or increase your maximum credit limit. More specifically, you can:

  1. Pay off your debt: The less money you owe the better your credit utilization ratio will be. A good strategy is to reduce your spending while making more than the minimum required payments each month.
  2. Ask for a credit limit increase: If you’re in good standing, chances are your lenders will agree to raise your maximum available credit, unless you’re a new credit user (less than 1-2 years). In case you owe the same amount but your credit limit is higher, your utilization ratio will be better.
  3. Keep credit card accounts open after you pay your balances: By keeping your credit card accounts open, you maintain the same credit limit. On the other hand, if you choose to close old credit card accounts, you’ll reduce your available credit. As a result, your utilization ratio will be worse. Also, old credit accounts boost more your credit score.
  4. Apply for a new credit card account: This tip is another way of increasing your maximum credit limit. However, you should sure you can handle it responsibly and avoid sinking more into debt. Also, you should note that when you apply for a new credit account, lenders will add a hard credit inquiry on your credit report. It means that your credit score will fall temporarily for a few points (5-10 points). You should weigh the matter depending on your situation to decide if that’s a good move for you.
  5. Use a personal loan to pay off your credit card balances: Some consumers use this method to improve their credit utilization ratio because your rate depends on the revolving credit you owe. In other words, you move your debt into an installment loan. This is a good method if you manage to get a loan with better interest rates than your credit cards. To achieve this, you’ll need to have a high credit score though. If you have a poor credit score, you’ll probably find a loan with higher interest rates than your credit card. The sure thing is, you’ll need to invest some time and discuss with your creditors to decide if this is a wise move to follow.
  6. Use a 0% Balance Transfer Credit Card to pay off your debt faster. If your credit card has a high-interest rate much of your payment is going to interest rather than principle. One way many people get their credit utilization lower is by transferring the balance to a card that is offering 0% on all balance transfers. Just be careful of fees that come with your balance transfer.

How does credit utilization affect your credit score?

Your credit utilization ratio affects directly your credit score as it weighs for 30% on the FICO scoring model (the most popular one) and about 20% on VantageScore (the second most popular model).

Although your ratio indicates the total amount of revolving credit you owe divided by your credit limit, each credit card account has its own utilization ratio. It’s important to keep each individual ratio low as well.

The majority of creditors, employers, landlords, or insurance companies check your FICO score. Obviously, you can’t skip paying attention to your credit utilization ratio.

What is a good credit utilization rate?

Any utilization ratio below 30% is considered good. Note that this is the maximum number you should use and not the recommending one.

For example, if your credit limit is $10,000, you should owe no more than $3,000 at the end of the billing period.  Some experts suggest keeping your ratio below 10% if you want to achieve a really high credit score.

However, a 0% ratio is not a good indicator too.

There’s no reason to panic if you exceeded this limit for a month. You have only to pay your balances before the billing period.

How can you calculate your credit utilization rate?

  1. Add all your credit cards’ balances
  2. Add all your cards’ credit limits
  3. Divide the final balance by your maximum credit limit
  4. Convert this number into a percentage by multiplying it by 100

You can use a table like this:

CARD 1$500$2,000
CARD 2$300$1,000
CARD 3$700$3,000

Then, divide 1,500/6,000 and you’ll get 0.25. Now, multiply 0.25×100 and you’ll get 25. This is your credit utilization ratio (25%).

You can find your per-card utilization rate using the same method.

Why does the credit utilization ratio affect credit score?

Creditors use numbers such as credit utilization ratios to determine how risky a borrower you are. A high credit utilization rate indicates that you can’t handle credit well or you’re experiencing financial difficulties.

Further, the more money you owe the higher the risk is for your lenders. If you already owe too much money or you’ve maxed out your credit cards, you seem less trustworthy when applying for new credit accounts.

Should I apply for a new credit card to improve my credit utilization ratio?

It can be beneficial in the long term. However, you should note that every time you apply for a new credit account, a hard credit inquiry will deduct a few points off your credit score. This inquiry becomes less powerful as time passes.

Also, you should be sure that you can responsibly handle a new credit card account. A new credit card can lure you to unnecessary spending and many different balances may confuse you. The point is to raise your credit score and not sink more into debt.

If you’re not sure this is the right move for you, you can take advantage of the above-mentioned ways to improve your ratio and successfully increase your credit score.

In addition, you should avoid applying for many different credit cards in a short period of time. This behavior can deduct many more points off your credit score as it triggers a red flag to your potential lenders.


Your credit utilization ratio is among the most important credit-scoring factors, so you should pay attention to it to build a good credit score.

You can improve your ratio by reducing the amount you owe or by exceeding your maximum credit limit. Fortunately, you can easily calculate your per-card and total credit utilization ratio following the formula above.

If you pursue a high credit score, improving your credit utilization rate should be among your top priorities. You can start by following the above-mentioned practical tips!

Credit Utilization Ratio FAQs

Is 0% a good credit utilization ratio?

No, it isn’t because it indicates that you aren’t actually using credit. Creditors like to see that you’re using your credit cards responsibly without abusing them.

When is credit utilization reported?

Usually, every 30 days. Credit card companies often report your details to the three major credit reporting bureaus so they can update your credit reports.

What happens if I exceed the recommended 30% credit utilization ratio?

A ratio above 30% will have a negative impact on your credit score. Some experts even recommend keeping your rate below 25%. Nothing destructive will happen if you temporarily exceed this limit, as long as you pay your balance before the end of the billing period.

Is the per-card ratio or total credit utilization ratio more important?

Creditors use to check the total credit utilization rate. Ideally, you want both per-card and total ratio to be under 30%. When I have overly used one credit card in the past the next month my credit score took a 20 point drop.

Do installment loans or other types of credit affect the credit utilization rate?

No, they don’t. Your credit utilization rate refers to your revolving credit. Mortgages and auto loans don’t affect this number.
This is the reason why some credit card users transfer their debt into a personal loan to achieve a better utilization ratio.

Can credit repair companies help me improve my credit utilization ratio?

Probably not, they can only advise you how to improve it yourself because these numbers depend only on the amount you owe and your credit limit. It’s better to use this amount to pay off your debt and your credit utilization ratio will be improved.

Usually, consumers hire credit repair professionals to help them remove negative credit report inquiries that are difficult to be removed from their credit reports.

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