In short, your credit utilization is the percentage of total credit used in comparison with the total credit available.
Calculate your utilization by dividing your balance by your limit. For a simple example, let’s say you have one credit card, and it has a 10,000 dollar limit. If you owe $2,500 on that account, your utilization rate is 25%. To figure your own utilization rate, be sure to include the balances and limits of all of your open credit accounts.
Credit utilization is 30% of your FICO credit score. This is the second biggest impact on your score, after payment history at 35%. That means keeping your utilization rate low is essential to having a good credit score. An important key to keeping your utilization rate low is to not close accounts with balances. We talked about this yesterday in our post “To Close or Not to Close Your Credit Card–That is the Question“.
Generally, a good credit utilization rate is 10% or less. It won’t kill you to go a bit higher, but if you are using more than a third of your available credit, you should work to pay down outstanding balances to improve your credit.
Be aware that the balance shown on your monthly statement is used to calculate your utilization rate, even if you pay off the balance after you receive your statement. If you’re serious about keeping your utilization rate low, you should pay off your balances before your creditor sends your monthly statement.
There are some pitfalls when it comes to your utilization rate. If your credit card companies lower your credit limits, your utilization rate will go up (and your FICO score will go down) through no action of your own. The only option you have in these situations is to pay down balances and work to keep your credit sore high. Unfortunately, creditors are doing things like closing accounts and lowering credit limits in reaction to laws like the Credit CARD Act, so you may face this problem even if you pay your bills responsibly every month.