What Is Credit Utilization?: Understanding Its Impact
April 2024
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Melinda Opperman
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.
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.
Melinda Opperman
Article written by
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.
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