What is a credit utilization ratio?
Your credit utilization ratio, which is also known as your credit utilization rate, is the ratio between how much revolving credit you're currently using and how much is available to you. Revolving credit is defined as accounts with balances that can vary from month to month, like credit cards.
Statistics show that a high credit utilization ratio indicates a higher risk of default on loans, so your ratio has a huge effect on your credit score. Here's what you need to know about yours and how to make it work for you.
How do you calculate your credit utilization ratio?
You calculate your credit utilization ratio on a single card by dividing your current balance by your credit limit and multiplying it by 100. So if you have a $10,000 limit and a $2,000 balance, your credit utilization ratio would be 20%.
Your credit utilization ratio on each card matters, along with your ratio across all of your credit cards. You'd calculate this number in more or less the same way. Add up all your current balances and divide this by your total credit limit across all your cards, and then multiply the number by 100.
What's a good credit utilization ratio?
The credit utilization rule of thumb is to keep your ratio under 30% and lower if you can. Anything over this is considered to be a high ratio, and this can hurt your credit score (as we'll explain below).
It isn't really possible to have a credit utilization ratio that's too low as long as you're using some credit. A low ratio shows that you manage your money well and you don't need to rely heavily on credit to fund your lifestyle. But if you don't use credit at all, lenders have no insight into how you'll handle borrowed money and many will deny you or require a cosigner rather than take a chance that you may default. So make sure you use some credit routinely, even if it's only a small amount. Consider charging a small expense to your credit card every month and paying it off -- for example, you can set up a regular bill, like a streaming service, to be charged to the card.
How does your credit utilization ratio affect your credit score?
Your credit utilization ratio makes up 30% of your FICO® Score, making it the second-most important factor after payment history. It also accounts for 20% of your VantageScore, another popular credit scoring model. VantageScore considers your available credit -- your credit limit minus your current balance -- in its model as well, though this only accounts for 3% of your score.
Your credit utilization ratio can mean the difference between good credit and fair credit or fair credit and poor credit, so you must watch yours carefully. There aren't really strict credit utilization tiers beyond low and high, but usually, the lower your ratio is, the higher your credit score will be and the higher your ratio is, the lower your score will be.