How Does Credit Utilization Impact My Credit Score?


Several factors impact your credit score. These include which types of credit you use and how much debt you owe. However, your credit utilization ratio is one of the most important factors when calculating your credit score.

Understanding the ins and outs of credit utilization rates can be challenging without the right information. In this article, we will unpack the following topics:

  • The basics of credit utilization and how it works
  • Why a good utilization percentage is essential for your credit score
  • How you can minimize your utilization ratio

Keep in mind that lower credit utilization percentages lead to higher credit scores in the long run.

What Is Credit Utilization Ratio and How Do You Calculate It?

Credit utilization (also called “debt-to-credit ratio”) is the percentage of your total credit balance compared to your maximum borrowing limit. It’s not as complicated as it may seem, but it does affect your credit score.

Suppose you have three credit cards with individual borrowing limits of $3,000. Together, these credit cards equal $9,000 in total credit.

Now assume you have a balance of $1,000 on two of your cards and $0 on the third. Your total balance is $2,000.

By dividing your total balance (2,000) by your total borrowing limit (9,000), your utilization rate is 22%.

Why Is Credit Utilization Important?

Credit utilization is one of the primary tools lenders use to assess your lending risk. Credit card issuers lose money if you fail to pay what you owe them.

Lenders using credit scoring models like FICO will assess your credit utilization ratio to determine if you are likely to default on your payments. That is why managing your credit utilization rate is important and helps avoid problems that may disqualify you from low-interest loans or credit-building opportunities.

How Does Credit Utilization Impact Your Credit Score?

Credit utilization accounts for nearly 30% of your credit score under the FICO model. The other 70% include factors like:

  • Your long-term and short-term payment history
  • The number of credit accounts you have open
  • Hard inquiries (usually conducted by lenders when opening a new line of credit)
  • Past credit accounts

Credit utilization is the second most important factor creditors consider when calculating your credit score. The first is your payment history.

What Is the Ideal Credit Utilization Ratio?

Most credit experts recommend keeping your credit utilization ratio below 30%. However, staying between a 15% to 23% ratio is something most responsible borrowers with multiple lines of credit can do.

The more lines of credit you have open, the lower your total utilization ratio will be on your credit report. That is because you can balance your spending across several credit cards. However, creditors can monitor your accounts for high credit utilization rates on individual credit cards.

Suppose you have a 25% credit utilization score across multiple lines of credit. However, you routinely spend one credit card more than others—sometimes exceeding a ratio of 40% or 50% on a single card. In this case, credit bureaus may still lower your credit score by a few points.

It’s best to keep all your credit utilization ratios as low as possible to avoid lowering your credit score by overusing one card. If you worry that a major purchase might cause your ratio to spike, pay it off as soon as possible (preferably that day) to prevent discrepancies on your credit report.

How Do You Lower Your Credit Utilization Score?

Don’t worry if your current utilization percentage isn’t in the desired range of less than 30%. You can use these five practical strategies to lower your credit utilization in just a few months and increase your credit score:

1. Keep Credit Accounts Open

Closing a credit card account can lower your total borrowing capacity and increase your credit utilization ratio, hurting your credit score. Even if you aren’t using a credit card, consider keeping it open until you can spend less on your other lines of credit.

Still, exceptions may apply. If you have a credit card with a high annual fee, it may be cost-efficient to close the account and apply for a new credit card with lower or no annual fees.

2. Zero Out Your Card Balances

Paying what you owe on time is a surefire way to reduce your credit utilization ratio and increase your credit score. This habit also prevents you from accumulating debt from interest at the end of the billing cycle. If you aren’t sure how to start paying down your credit cards, focus on the high-interest-rate cards first.

Alternatively, you can take out a personal loan to lower your credit card balances. Loans will not affect your credit utilization ratio. However, they can lead to runaway debt if you aren’t careful.

3. Call Your Lender and Ask for a Credit Increase

You can request a credit limit increase from your lender if you have a good credit history with them. Most lenders are willing to negotiate on a case-by-case basis over the phone. With a higher credit limit, your utilization ratio will drop, even if you spend the same amount on that card. This can lead to a better credit score.

Don’t increase your borrowing limit if you worry that it may tempt you to spend more than you can afford. Calculate your monthly expenses, so you have an idea of what you can pay each billing cycle.

If your lender increases your borrowing limit, try to avoid spending more than your initial rate.

4. Rotating Credit Cards Can Help Credit Utilization

Consider rotating your credit cards each month to pay for day-to-day expenses. This method keeps you from growing your credit utilization ratio too high on a single card without maxing out your credit limit.

5. Set Balance Alerts

Setting alerts keeps you from spending too much and exceeding a healthy credit card utilization. Some credit card companies offer these tools on their websites. You can sign up for an app that helps you track your payments.

You can also ask your credit card provider when it does its monthly reporting. This way, you schedule payments on your calendar to prevent interest from piling up.

Learn More About Credit Utilization and Build a Better Credit Score

At Boost Your Score, we make understanding your credit score and building good credit simple. Contact us to learn how our services can help you establish, grow, and maintain a healthy credit utilization percentage. Call 1-800-259-1270 to get started!

Disclaimer: Boost Your Score does not offer financial advice. The information presented on this page is intended for general consumer awareness and does not constitute legal, financial, or regulatory counsel. This content does not represent the perspectives of any issuing banks. While the information might include third-party references or content, Boost Your Score does not validate or guarantee the third-party information's precision. Internal links are promotional content for Boost Your Score products. Please take into account the publication date of Boost Your Score's original content and any related content to fully grasp their contexts.

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The team at Boost Your Score has over 50 years of combined experience in credit building. Our goal is to help individuals take control of their financial destiny and improve their credit scores. We provide guidance and support regardless of your credit history, whether you're just starting your credit journey or looking to take your score to the next level.

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