Your credit utilization ratio, or credit utilization rate, is the amount of your revolving credit balance divided by your total available credit.
Your credit utilization rate only considers revolving lines of credit. Installment loans such as mortgages and auto loans are not included.
Unlike a loan, revolving credit renews when you pay it off. Think of credit cards, gas cards, and home equity lines of credit (HELOCs). If you have a $500 balance on a card with a $5,000 limit, then your available credit is $4,500. But when you pay off the $500 balance, that amount “renews,” and your available credit becomes $5,000.
How to Calculate Your Credit Utilization Rate
Your credit utilization is your total credit used among all revolving accounts to total credit available. However, each account also has its own credit utilization rate.
Let’s say you have two credit cards, each with a $10,000 limit. Your total available credit is $20,000, and your total outstanding balance is $7,000.
Your overall credit utilization ratio would be $7,000 / $20,000 = 35%.
If one card has a balance of $5,000 and the other has a balance of $2,000, then your per-card utilization rate would be 50% and 20%, respectively.
Why Your Credit Utilization Rate Matters
Your credit utilization ratio is a significant factor that affects your credit score. Lenders use this metric to determine whether or not to loan you money as well as the amount and interest rate of your loan.
Credit companies commonly recommend keeping your utilization rate to 30% or below. If you have a credit card with a $5,000 balance, that means you should try not to exceed a balance $1,500. However, the 30% metric isn’t a hard-and-fast rule.
According to Vantage Score, “Experts routinely recommend that consumers keep levels at or below 30 percent, and various articles advise levels from 10 percent to 50 percent. The optimal ratio always will be as close to zero percent as possible, but it’s still possible to have elite credit scores with higher ratios.”
Generally speaking, the lower your credit utilization, the more responsible and creditworthy you appear to potential lenders. A higher credit utilization rate could indicate that you’re more of a risk to lenders, which may prevent you from qualifying for loans or lower interest rates.
How to Lower Your Credit Utilization Rate
You can lower your credit utilization ratio, and possibly improve your credit score, in a few ways:
Request a credit limit increase. Call your credit card issuer or go online to see if you can get approved for a higher limit on your account. This will lower your credit utilization ratio as long as your account remains at or below its current balance.
Pay down your outstanding balances. Paying your balances in full every month is ideal. If you’re not able to do that, then aim to keep them as low as possible. Paying more toward your balance than you spend every month will help you chip away at your debt and improve your credit standing.
Open new credit accounts. New accounts will add to your available credit and lower your credit utilization rate. However, if not used responsibly, new lines of credit can harm your overall financial standing. Opening new accounts or too many accounts at once can also cause your credit score to drop in the short term.
Keep old accounts open. As you pay off your credit card balances, keep your accounts open, even if you don’t use them. Closing old accounts that are no longer in use can increase your credit utilization ratio and adversely affect your length of credit history, another factor used to determine your credit score.