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How Your Credit Card Utilization Can Affect Your Score

Credit scoring models take multiple factors into account when assessing your credit risk. The FICO® scoring model, for example, looks at your payment history and your credit mix. Another important factor that it considers is your credit card utilization rate. If you’re not sure what your credit utilization ratio is, we’ll explain how to calculate it and how it affects your credit score.

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What Is Your Credit Utilization Ratio?

Your credit utilization ratio is the amount of credit you’re using compared to your total credit limit. You can calculate your credit utilization ratio (also known as your debt-to-credit ratio) by dividing your credit balance by your credit limit and multiplying the result by 100.

Having a low credit utilization ratio is important if you want a good credit score. In fact, the amount of credit you’re using and the amount of debt you owe make up 30% of your score (according to the FICO® scoring model). By using a small amount of your available credit, you pose less of a risk to lenders.

Overall Credit Card Utilization vs. Individual Card Utilization

How Your Credit Card Utilization Can Affect Your Score

Credit scoring models look at your overall credit utilization and the utilization rate for each of your credit cards. Your credit utilization ratio for a single card depends on the balance you’re carrying relative to the card’s credit line. Your overall credit utilization ratio combines all of your credit card balances and divides them by the sum of your credit limits.

For example, if one credit card has a $400 balance and a $2,000 credit limit, your credit utilization ratio for that individual card is 20% ($400/$2,000 x 100). If you have a second credit card with a $800 balance and a $1,000 credit limit, your overall utilization ratio is 40% ($400 + $800 divided by $2,000 + $1,000 x 100).

High credit utilization in either form can hurt your credit score. That’s something to keep in mind before trying to spread out your balances across different credit cards. Generally, it’s best to keep your utilization ratio below 30%.

How to Lower Your Credit Utilization Ratio

How Your Credit Card Utilization Can Affect Your Score

There are several steps you can take to keep your utilization ratio low and credit score in tip-top shape. It’s best to keep an eye on your credit card balances so that you’re not racking up too much debt. Your credit card issuer may be able to send you mobile alerts whenever your balances rise too high.

You might also want to try raising your total credit limit by requesting a credit line increase. This could be worth considering if you’re having a hard time keeping your utilization ratio under 30%. But increasing your credit line could cause your credit score to dip, especially if you spend too much money and you can’t pay your credit card bills.

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Jennifer Stinnett Jennifer Stinnett writes about a variety of personal finance topics for SmartAsset. Her expertise includes retirement, taxes and home buying. Jennifer has a degree from Florida State University in English with a focus on Editing, Writing and Media.
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