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What is Your Credit Utilization Ratio?

Last Updated: February 11, 2024

5 min read

Key points about: how to understand your credit utilization ratio

Your credit utilization ratio represents the portion of your available credit that you’re using.
You can calculate your credit utilization ratio by dividing the total of your balances by the total of your revolving credit.
High credit utilization can indicate you’re having trouble paying your balances and can lower your credit score.

Your credit utilization ratio (also known as a credit utilization rate) represents the percentage of your total available credit that you’re using.

Only revolving credit accounts, such as credit cards or personal lines of credit, are included in your credit utilization ratio. Revolving credit is the type of credit that you can borrow against, repay, and borrow from again.

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Let’s learn more about managing your credit utilization, from calculating your ratio to steps you can take to improve it.

How do you calculate your credit utilization ratio?

Remember, when it comes to your credit score, your credit utilization ratio only involves your credit cards and personal lines of credit.

You can follow these steps to determine your credit utilization ratio:

Add up the outstanding balances on all your revolving credit accounts (your total revolving debt).
Add up the credit limits on all your revolving credit accounts (your total revolving credit).
Divide your total debt by your total credit limit.
Multiply the remainder by 100 to arrive at your credit utilization ratio percentage.

For example, suppose you have two credit cards with credit limits of $1,000 and $2,000—the first card has a balance of $500 and the second a balance of $700, making your total credit $3,000 and your total credit card balance $1,200. Divide 1,200 by 3,000 to get 0.4. Finally, multiply 0.4 by 100 to get your credit utilization ratio of 40%.

You can also calculate the credit utilization ratio of a single revolving credit account using the same method: divide your current outstanding balance by your credit limit and multiply the result by 100.

Can a high credit utilization ratio hurt your credit score?

Credit utilization is one of the factors that significantly impact credit scores. Using a large portion of your available credit can lower your score.

Here’s why: Credit bureaus use credit scoring models (or mathematical algorithms) to arrive at your credit score based on the information in your credit report (a record of your borrowing and repayment activity). Credit utilization typically accounts for 30% of your credit score. So, the amount you owe when lenders report your credit information to the credit bureaus can affect your score.

Lenders usually report your account balances to credit bureaus at the end of your billing cycles, typically every 30 to 45 days, according to Experian. That means credit bureaus can’t see your daily credit card balances; they only know the amount you owe on your monthly billing statements, which is the amount reflected on your credit report and score as amounts owed.

Say you make a large purchase on one of your credit cards and don’t make a payment towards it before the credit card company issues your monthly statement. In that case, the credit utilization on your credit report will reflect the large purchase. This could increase your utilization and potentially lower your credit score. However, your credit score should bounce back once you pay off the balance.

Ultimately, a high credit utilization percentage indicates that you may be overextending yourself or having trouble managing your finances. A low credit utilization rate points to better borrowing habits.

Did you know?

A mobile banking app can help you manage your credit card account. Among other features, the Discover^® mobile app lets you check your current balance, make payments, and set spending alerts to help you maintain a low balance.

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What is a good credit utilization ratio?

We’ve established that it’s best to keep your credit utilization low, but how low is low enough?

Experts recommend keeping your credit utilization below 30%, ideally below 10%, according to Experian. But you may not want to go too low; a 0% ratio can help your credit score if you’re actively using your card, but a 0% ratio from inactive use may not. Part of building a good credit history is showing you can borrow and repay your debt. That means regularly using your credit and managing it responsibly.

How can you improve your credit utilization ratio?

If you calculate your credit utilization ratio and find it exceeds 30%, there are steps you can take to help lower it:

Pay down debt: Paying your debt is one of the best ways to lower your credit utilization ratio. But because your lenders report your balances at the end of your billing cycle, the timing of your payments can impact how quickly you see improvement to your credit score. Consider making payments to your balances before the close of your billing cycle. And if you make payments after receiving your statements, try to pay more than the minimum required. Once you pay down your debt, you’ll need to maintain low balances to sustain your ratio.
Monitor spending: Keeping tabs on how much you’re charging can go a long way in helping you lower your credit utilization. If your credit card company has a mobile app, you may be able to set spending alerts that notify you when you’ve reached a certain balance. And managing your spending may help you manage payments, too.
Request a credit limit increase: Because increasing your total available credit can help lower your credit utilization ratio, it may help to ask your lender to raise your credit limit. Your lender will consider your monthly income and expenses, length of credit history, payment history, and current credit utilization percentage, among other factors. However, your request might not get approved, and a credit limit increase only works if you keep your balance proportionately low.
Open a new revolving credit account: Another way to increase your available credit is by opening a new credit card or personal line of credit. But you’ll still need to keep your balances low to manage your debt compared to your total available credit. And while opening a new account can increase your total credit, applying for too many new accounts within a short time may hurt your credit score.
Make a balance transfer: Making a balance transfer using a new balance transfer credit card may help you increase your available credit in a few ways. If you have multiple high-interest balances, moving your debt to a single card can free up the available credit on your other revolving credit accounts while providing a new line of credit. Additionally, some new credit cards offer a low to 0% introductory interest rate on balance transfers, which can help you pay your debt more quickly by avoiding expensive interest charges.

Credit utilization ratio is one major component for calculating credit scores. Understanding how credit utilization works, including how to calculate your rate, can help you manage your score.

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