What is credit utilization?

Key takeaways

In this article, we’ll cover the following to help you get familiar with credit utilization:

• Credit utilization is an overlooked yet very important factor when determining someone’s credit score. In fact, it counts as 30% of your credit score.
• Calculating your credit utilization ratio is easy to do with some simple math. Knowing your credit utilization score is important when it comes to maintaining a good credit score.
• If your credit utilization ratio is lower than you’d like it to be, there are several ways to improve it.

Credit utilization is an often overlooked yet key component of everyone’s credit score. Your credit utilization ratio shows the amount of revolving credit–such as credit cards and other lines of credit–you’re using, divided by the total credit available to you.

Lenders look at your credit utilization score to see how well you’re managing your current debt and to help them decide how reliable a borrower you are. Many people aren’t aware of their credit utilization score, but it’s actually one of the main pieces of information lenders consider when processing loans. Credit utilization ratio counts for about 30% of your FICO credit score, which is significant. And that makes your credit utilization important enough to keep an eye on as you’re managing your finances.

What is included in the credit utilization calculation?

Credit utilization takes into account all your revolving credit. Revolving credit is a line of credit that remains available over time, with no expiration dates, even if you pay the full balance. This type of credit allows you to borrow money up to your predetermined credit limit and then pay it back based on the terms of your loan. As you pay down your balance, that money becomes available again, minus interest charges and any fees. Some examples of revolving credit include:

• Credit cards, including those in your name as an authorized user
• Personal lines of credit (PLOCs), which is a line of credit where a borrower writes special checks or requests a transfer to their checking account; the borrower then receives a monthly bill from their bank or credit union and must pay back the money based on what they borrowed
• Home equity lines of credit (HELOCs), which is a type of credit often used for large expenses; the credit is secured by your home, which means if you don’t make payments toward the credit balance, the lender can use your home as collateral

Since credit utilization only takes into account your revolving lines of credit, there are some types of loans that are not considered when calculating your credit utilization ratio. Installment loans, which are credit accounts that are paid back over a set period of time, are not factored into your credit utilization score. Examples of installment loans include:

• Mortgages
• Personal loans
• Auto loans
• Student loans
• Home equity loans (which are not the same as home equity lines of credit)
• Any secured loans that use collateral

How to calculate your credit utilization

It’s important to know your credit utilization ratio, especially if you’re considering borrowing money. As we mentioned, lenders take a close look at credit scores when reviewing loan applications, and your credit utilization ratio is a major factor in your credit score. Fortunately, it’s quite easy to calculate your credit utilization.

1. Add the balances on all your revolving credit accounts.
2. Add the credit limits of all your revolving credit accounts. Both your balances and your credit limits can be found on your credit report.
3. Divide the total balance by the total credit limit.
4. Multiply by 100 to get your credit utilization ratio expressed as a percentage.

Let’s look at an example.

Credit utilization calculation example

We’ll work through an example that involves three credit cards to find the credit utilization ratio.

1. Balances: You have three credit cards; one has a balance of $500, one has $200, and the other has $300
2. Credit limits: One credit card has a $2,000 limit, and the other two cards have $3,000 limits
3. Calculations:
   1. Total balance: $500 + $200 + $300 = $1,000
   2. Total credit limit: $2,000 + $3,000 + $3,000 = $8,000
   3. Credit utilization: $1,000/$8,000 = 0.125
   4. Credit utilization percentage: 0.125 x 100% = 12.5%

Based on the calculations, the credit utilization ratio is 12.5%. But is that a good score?

What is a good credit utilization score?

The short answer is yes, 12.5% is a good credit utilization score. Why? Because the general rule is the lower your credit utilization score, the better. There is no specific number, but a good guide to follow is to keep your credit utilization ratio below 30%.

As we previously mentioned, your credit utilization score makes up 30% of your FICO credit score. That means it’s important to monitor and manage your credit utilization so your credit score remains solid. Again, lenders look at your credit utilization score to see how you’re managing your debt. This helps them determine whether you’d be a reliable borrower.

It’s important to note that, while a low credit utilization ratio is ideal, a 0% credit utilization score is not. If your score was at 0%, it would likely mean that you don’t have a credit history, which can work against you if you ever need to take out a loan.

Individual vs. total credit utilization

When discussing credit utilization, it is important to note the differences between individual and total credit utilization.

Individual credit utilization is the utilization of one revolving account, while total credit utilization includes the balances and credit limits of all your revolving accounts. Both individual and total credit utilization ratios can impact credit scores.

For example, when we calculated the sample credit utilization ratio earlier in this article, that was a calculation of total credit utilization because we added all of the credit card balances and all of the cards’ credit limits together to determine the score.

If we broke them down individually, however, we could find out the individual credit utilization score. As a comparison, let’s break each of those sample credit cards down one by one.

• Credit card 1: $500 balance, $2,000 credit limit. $500/$2,000 = 0.25. 0.25 x 100% = 25% individual credit utilization for this card, which is a good score.
• Credit card 2: $200 balance, $3,000 credit limit. $200/$3,000 = 0.067. 0.067 x 100% = 6.67% individual credit utilization for this card, which is a great score.
• Credit card 3: $300 balance, $3,000 credit limit. $300/$3,000 = 0.10. 0.10 x 100% = 10% individual credit utilization for this card, which is also a great score.

Credit scores consider both individual and total credit utilization ratios, which is why it’s important to frequently keep an eye on your credit card balances to make sure they stay low. Even having just one credit card with a high individual credit utilization ratio can negatively impact your total credit utilization. And with credit utilization making up 30% of your FICO credit score, it’s worth paying attention to all of your revolving credit.

How to improve your credit utilization

Even if your credit utilization ratio is currently higher than you’d like it to be, the good news is that it’s pretty easy to improve that number. Here are a few ways:

• Pay your balances early, and keep them as low as possible each month. This will also save you some money in interest payments.
• Ask your credit card issuer to raise your credit limit. Doing so will give you more available credit. That instantly lowers your credit utilization, even if you don’t pay off more of the balance.
• Open another credit card or other revolving credit. Starting from scratch on a new card can help keep your credit utilization low. However, don’t do this too often. Each time you open a new card, the credit card issuer will pull a hard inquiry on your credit report–and too many of those can negatively affect your credit score.
• Consolidate your debt with a personal installment loan. This allows you to pay off your debts and lower your credit utilization. Plus, remember that installment loans are not considered when calculating your credit utilization ratio, so you can pay off your credit card balances with a loan that won’t impact your score. Sun Loan offers personal installment loans with low monthly payments. Learn more here.

Take control of your credit utilization

Managing your credit utilization not only helps you improve your credit score, but it also ensures that you’re being financially responsible by consistently paying down your credit card balances on time. Use the examples we provided to calculate your credit utilization score. If it’s higher than 30%, take some of the simple steps we mentioned to improve it. Once you see your credit score improve, you’ll be glad you did.

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