It sounds like an intimidating term, but credit utilization ratio is just a fancy way of saying how much of your available credit you're using at any given time. It's important for you to check in on yours frequently because it accounts for a hefty chunk of your credit score — in fact it's one of the top two criteria that is considered.
So what is credit utilization ratio? It's the money you owe on your credit cards, divided by your total credit card limit. A good number to aim for is 30% or lower. But the lower the better.
In this article we'll answer the following questions:
- Why does your credit utilization matter?
- How do I calculate my credit utilization ratio?
- How can I lower my credit utilization ratio?
- What is an ideal credit utilization ratio?
Why does your credit utilization ratio matter?
Understanding how your card usage affects your credit utilization ratio is an important part of managing your credit. You'll want to keep this handy calculation top of mind as you use your cards throughout the month for spending. It's also important to know before you open a new card or close an existing one, because any change in your available credit will directly affect your utilization ratio.
Credit reporting agencies use this ratio as a barometer of your ability to manage credit (a.k.a. your creditworthiness). A lower ratio suggests you're managing your available credit wisely and may work favorably for you when applying for a loan or new credit card.
How to calculate your credit utilization ratio
You'll want to refer to your credit card statements or log into your online credit card accounts to find some of these figures.
- Add up the total of all outstanding balances on your credit cards.
- Add up the total of all your credit limits (even the cards you aren't using).
- Divide your total outstanding balances (from Step 1) by your total credit limit (from Step 2).
- Multiply that number by 100 to see your credit utilization as a percentage.
Here's an example using the steps above:
- Your total outstanding balances equal $1,000.
- Your total credit limit on all cards equals $5,000.
- When divided, 1,000 / 5,000 equals 0.2.
- When you multiply 100 x 0.2, your credit utilization ratio is 20%
How to lower your credit utilization ratio
You can lower your credit utilization ratio in two ways — by increasing your available credit line or decreasing the balance of credit you owe. There are several levers you can adjust in order to do this and they are outlined below.
Keep all your credit cards open
Even if you have credit cards you are no longer using, keeping them open will preserve your available credit limit. For example, if you close a card with a $5,000 limit, your utilization ratio will immediately increase because the amount of available credit you had before has significantly changed. If you want to avoid this, you can keep that card open so your line of available credit stays in place regardless of if you use it or not.
One caveat here is if you have an unused card that has an annual fee. In this case, it may make the most sense to close it so you don't incur that fee. Just be aware of how this affects your utilization before doing so.
Open a new credit card
Another lever you can adjust is adding to your available credit. You can do this by opening an additional credit card. There are many considerations to weigh before opening a new credit card though. One of which is a hard inquiry to your credit score when you apply. This is a small, temporary hit to your score that tends to recover quickly if you pay your monthly minimum payment on time. And, as mentioned above, if the new card has an annual fee, you'll want to factor that into your decision to apply.
Pay down credit card balances
One straight-forward way to lower your credit utilization ratio is to pay off your card balances.
Increase your credit limit
Your credit card issuer may increase the credit limit on an existing card if you request it. Even a small increase in your credit line will lower your utilization ratio. Call your card issuer to discuss an increase in your limit.
How much of my credit should I use?
A general rule of thumb is to keep your credit utilization ratio below 30%. And if you really want to be an overachiever, aim for 10%. According to Experian, people who keep their credit utilization under 10% for each of their cards also tend to have exceptional credit scores (a FICO® Score☉ of 800 or higher).
Addressing frequently asked credit utilization questions
What ratio is considered good in the eyes of a lender? Let's take a look at several different numbers.
Is 10% credit utilization good?
Assuming you're able to pay your balance on time each billing cycle, a 10% utilization ratio is excellent. Lenders will likely look favorably on this as a sign you are responsible with your credit. When you stick to this ratio, you may quickly and positively impact your credit score.
Is 24% credit utilization good?
A 24% credit utilization is considered good. Anything below 30% is putting you on track to improve your credit score and look favorable to lenders.
Is 50% credit utilization good?
A 50% credit utilization ratio is not ideal. This means you are using half your available credit and may signal to lenders that you're having trouble paying off your debts or revolving your debt from month to month.
To see how utilization may be affecting your credit scores, check your credit report regularly. You can calculate your credit utilization ratio yourself by following the steps outlined above. Aim to keep your utilization ratio below 30%. If you'd like extra help and resources, sign up for Chase Credit Journey® – a free tool for everyone that lets you monitor your credit score, plus offers customized insights on your payment history, credit usage and other factors that contribute to your score.