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While your credit card's balance tells you how much you owe, the card's credit utilization ratio is the percentage of its credit limit you're using. Credit utilization is an important factor in your credit score, and having a low utilization can help your credit score. However, some confusion can result because credit card utilization calculations don't use your card's current balance—they depend on the credit card's statement balance as it appears in your credit report.
What Is a Credit Card Balance?
Your credit card balance can refer to your card's current balance or its statement balance.
- Current balance: The current balance is what you see when you log in to your account or check your balance on a mobile app. It's the most recent statement balance, plus any additional transactions, including purchases, payments and fees.
- Statement balance: A credit card's statement balance is the balance that appears on the card's most recent statement. It's a snapshot of your card's current balance at the end of a billing cycle, and the statement balance is what determines your monthly minimum payment.
The due date for your credit card bill is often about three weeks after a statement is created, and your current balance might be higher if you've used your card during this time. The amount you owe on your monthly bill is still determined by the statement balance.
If you pay your statement balance in full, you can avoid accruing interest on your purchases. You have the option to pay less—down to the minimum payment—to avoid late payment fees and possibly hurting your credit score. However, the rest of the balance and any new purchase you make will accrue interest.
What Is a Credit Utilization Rate?
A credit card's credit utilization ratio, or rate, is the percentage of the card's credit limit in use. For example, if a credit card has a $1,000 balance and a $5,000 limit, its utilization ratio is 20%.
To calculate the utilization ratio on a credit card, divide the balance ($1,000) by the credit limit ($5,000) and multiply the result by 100 to get a percent. In this case, 1,000 / 5,000 = 0.20, which then becomes 20%.
Credit scoring models use the ratio as a factor in determining your credit score, and having a low utilization rate is best for your scores. When calculating your scores, credit scoring models use the credit card balance and credit limit on your credit report.
Credit card companies generally report your account's information to the credit bureaus around the end of each billing cycle—when the statement balance is determined. This is why the balance on your credit report can be different from your current balance, and why your statement balance typically better reflects your credit utilization than your current balance.
Why Your Credit Card Balance and Utilization Are Important
Your card's balance and utilization are important because the balance represents what you owe and the utilization can significantly impact your credit score.
- If you're carrying a credit card balance: Paying down the balance offers a double benefit. First, you'll accrue less interest the faster you pay it off. And second, your credit score may increase as your balance drops.
- If you pay your balance in full each month: You won't accrue interest on your purchases. However, the statement balance is still reported to the credit bureaus and you could have a high utilization rate. To lower your statement balance and the resulting utilization rate, you need to pay down the balance before the end of the billing cycle.
Since a lower statement balance is better for your credit scores, you might consider paying off the balance in full every few weeks—or even more frequently. The best utilization rate is actually a rate in the low single digits, such as 1%. A very low utilization ratio shows that you use and manage your card, but you don't overextend yourself and won't have trouble taking on additional financial responsibilities.
Monitor Your Balances and Utilization
You can monitor your credit card balances during the month to figure out what will be reported to the bureaus. If you're trying to optimize your utilization rate to improve your credit score, you can try to add automatic payments to pay down your balance before the end of each statement. Or, set reminders for yourself to make payments before the end of each billing cycle.
Additionally, you can check your credit cards' current utilization rates by checking your credit report for free from Experian. Your account also shows your overall utilization rate based on the balances and limits of all your revolving credit accounts, which can also be an important scoring factor. And you can get tips for improving your score and track your score over time for free.