What Is Credit Utilization? | Understanding Its Impact

In short, credit utilization is the percentage of total credit used in comparison with the total credit available.

• How to Calculate Credit Utilization
  To calculate your utilization, divide your balance by your credit limit.
  • Example: If you have one credit card with a $10,000 limit and owe $2,500, your utilization rate is 25%.
  • Be sure to include the balances and limits of all your open credit accounts when figuring your utilization rate.

Why Credit Utilization Matters

Credit utilization accounts for 30% of your FICO credit score, making it the second most important factor after payment history (which accounts for 35%).

• Keeping your utilization rate low is essential to maintaining a good credit score.
• An important tip: Don’t close accounts with balances, as this can negatively impact your utilization rate.

For more details, check out our related post: To Close or Not to Close Your Credit Card–That is the Question.

What Is a Good Credit Utilization Rate?

Ideal Credit Utilization Rate: 10% or less. If your utilization is above 33% (one-third of your available credit), work to pay down outstanding balances to improve your credit score.

‍

Tips to Maintain a Low Credit Utilization Rate

Pay Off Balances Before Statements Are Sent.

• ‍Be aware that the balance shown on your monthly statement is used to calculate your utilization rate, even if you pay it off after receiving your statement.

• To lower your utilization rate, pay off your balances before your creditor sends your monthly statement

‍

Potential Pitfalls of Credit Utilization

Credit utilization can change due to actions by credit card companies:

• Lowered Credit Limits
  If your credit card companies lower your credit limits, your utilization rate will increase (and your FICO score will decrease) through no fault of your own.
• Closed Accounts
  Creditors sometimes close accounts or reduce credit limits in response to laws like the Credit CARD Act, even if you pay your bills responsibly every month.

How to Handle Credit Limit Reductions

If your credit limits are lowered:

• Focus on paying down balances as quickly as possible.
• Keep your utilization rate low to maintain a high credit score.