How to manage your credit utilization
Quick insights
- The amount of credit you use against your total available credit is called your credit utilization ratio and is an important factor that makes up part of your credit score.
- Typically, it’s a good idea to only use about 30% or less of your total available credit.
- If you are reaching your credit limit, there are some steps you can take to get back on track and lower your credit utilization ratio, such as lowering credit card balances and making regular payments.
Whether you’re about to open your first credit card account or have several active accounts, you might be wondering just how much of your credit you should be using. Below we’ll explain what credit utilization means and how it can impact you.
Understanding credit utilization
Credit utilization refers to the amount of credit you use from your total available credit limit. This encompasses credit limits on credit cards or other types of revolving credit.
Let’s say your total credit limit is $10,000 on a credit card. If you use that card to make $5,000 worth of purchases, you will have used half your credit limit, or 50%. In this case, your credit utilization ratio would be 50%.
If you have multiple cards, you can add up the total amount of credit you have and the total amount you’ve spent, then divide the balance by your total credit limit. For example, if you have two cards both with a credit limit of $5,000, your total available credit would be $10,000. If you spent $2,000 across both cards, you would divide 2,000 by 10,000 to get a credit utilization ratio of 20%.
Typically, it’s preferable to have a credit utilization ratio of about 30% or less.
The impact of credit utilization on your score
Your credit utilization ratio is an important factor that’s considered when determining your credit score. For VantageScore® 3.0, your credit utilization ratio accounts for 20% of your score. Your credit utilization ratio can negatively or positively affect your credit score, depending on your utilization.
A good rule of thumb is to keep your utilization ratio to about 30% or less.
When you maintain a healthy credit utilization ratio, you can positively impact your credit score. It can indicate you may not need to totally rely on credit cards and that you are more likely to pay back your potential lender.
On the other hand, if you use a large percentage of your credit limit, this may negatively impact your credit score. Reaching your credit limit and not paying your total balances can result in a lower credit score and may indicate that you are a riskier candidate to lenders.
Is having 0% credit utilization beneficial or detrimental?
Having a 0% credit utilization ratio means that you do not use any of your credit available to you. You could have one credit card with a $5,000 credit limit, but if you don’t use that card to make any purchases and your balance is $0, you would have a 0% credit utilization ratio.
While it can be beneficial at times to take breaks from spending and to help lower your ratio, having a 0% credit utilization ratio consistently could indicate that you lack credit activity and potentially hurt your score over time. Because credit history is an important part of your credit score, it’s helpful to keep your credit card account open and make purchases with your card from time to time.
If, however, you find that you never use the card and don’t need it, you may consider closing the account. This may make sense for you if your card comes with a large annual fee. Note that closing a credit card account, especially an old one, can negatively impact your credit score, as credit age and mix are another important aspect.
How much of your credit limit should you use?
Typically, it’s helpful to use about 30% or less of your credit limit. Higher than this, you may negatively impact your credit score. However, some banks usually report your credit activity to the credit bureaus when your statement closes, so if you exceed 30%, you could pay off your credit card before your statement closes to keep a low ratio.
What to do if you exceed your credit limit
Exceeding your credit limit depends on your issuer, as some may not allow more purchases once you’ve hit your credit limit.
If you are able to spend beyond your available credit, keep in mind that you may have to pay fees and that it may impact your score. Overspending regularly may even result in account closure.
Some steps you can take if you exceed your credit limit include:
- Stop making purchases on the card. This can help prevent even more fees and even higher balances.
- Review your credit card statements. Look at recent transactions and make sure that they are accurate. If your card was stolen and/or there was fraudulent activity, you should contact your issuer and report it immediately.
- Pay off as much of your balance as you can. If you exceed your limit and don’t make your payments, you could face high interest costs and accumulate debt quickly. Consider working with your credit card issuer to come up with a payment plan if needed.
- Contact your credit card issuer. If this is your first time going over your credit limit, consider reaching out to your card issuer to see what possible solutions are available and if it’s possible to increase your credit limit for the future.
- Make sure your income is up-to-date. If you haven’t updated the information of your income in your card account recently, you may want to do so as it helps credit card issuers evaluate you for credit limit increases and special offers.
Tips to help prevent exceeding your credit limit
Exceeding your credit limit comes with consequences, so consider the following tips:
- Set up alerts on your credit card accounts to notify you if you’re approaching your credit limit.
- Monitor your credit card balance and transactions on a regular basis by checking your bank’s website or mobile app. Take a closer look at your budget and spending habits and make cuts where possible to help lower your credit utilization ratio.
Start implementing long-term, healthy habits such as setting up automatic payments, reducing credit card balances and avoiding late or missed payments.
In conclusion
How much of your credit limit you should use depends on your particular financial situation. Using 30% or less of your available credit can help prevent hurting your credit score and may show lenders that you can manage credit responsibly.
