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Credit Card Basics

How Important Is Credit Card Utilization to Your Credit Score?

Credit card utilization, or the percentage of available credit you're using, is an important credit scoring factor and one of the few factors you can quickly change.

While some negative marks can remain on your credit report for up to seven years, many credit scoring models only look at your most recently reported utilization rates. As a result, paying down credit card balances may quickly improve your scores.

What Is Credit Card Utilization?

Credit card utilization refers to the relationship between your credit card's balance and credit limit as they appear on your credit report. That's an important distinction from your card's current balance, as card issuers generally report the balance to the credit bureaus around the end of your billing period. As a result, even if you pay your bill in full every month, you could still have a high utilization rate.

You can calculate your credit card utilization ratio by dividing the credit card balance appearing on your credit report by the card's credit limit. Then multiply by 100 to see the result as a percentage.

For example, if your card has a balance of $1,000 and limit of $5,000, then 1,000 / 5,000 = 0.2. Multiply by 100, and you get 20%.

You can review a free copy of your Experian credit report online. When you log in, Experian will do the calculations for you and show your overall utilization rate and the utilization rate for each of your credit cards—both are factors in your credit scores.

Depending on the scoring model, the utilization rate of other types of revolving accounts, such as personal lines of credit, may also be included.

How Does Credit Card Utilization Affect Your Credit Score?

Credit card utilization can have a direct and significant impact on your credit scores. Depending on whether it's a FICO® or VantageScore® credit score, utilization falls within one of the two most important categories in determining your score. In either case, higher utilization ratios can hurt your scores, while lower utilization rates can help them.

Most credit scores (there are many) only factor in your most recently reported balances and credit limits and the resulting utilization ratios. In these cases, using your card often or for major purchases can lead to a high utilization ratio that hurts your scores. But paying off the balance and maintaining a lower balance could help bring your scores back up.

Some of the latest credit scoring models, such VantageScore 4.0 and FICO® Score 10T, also consider your balance trends and payments over time. Having a history of paying off your balance in full or paying off your debt over time, rather than having a steady or growing balance, can help you improve these scores even more.

How to Reduce Your Credit Card Utilization Ratio

You can reduce your credit card utilization ratio by decreasing your reported card balances and increasing your available credit. There are different ways you can go about doing this:

Use Your Credit Card Less

Using your credit card less often will limit how high your balance grows before the card issuer reports the balance to the bureaus. It may be especially important if you have a card with a low credit limit. Experts recommend keeping balances below 30% of credit card limits as a rule of thumb, but even lower utilization could be better for your scores—think single digits for the best scores.

Make Early Payments

You may want to use a credit card for many reasons, including the rewards you can earn and cardholder benefits some cards offer on purchases. If you want to use your card, try to pay down the balance before the end of your billing period to lower the reported balance and thus your utilization ratio.

Increase Your Credit Limits

You can ask your card issuer for a credit limit increase, although some card issuers will want to pull your credit with a hard inquiry (which may hurt your scores a little) to verify you qualify for one.

Keep Credit Cards Open

If you have a card that you rarely use, you may still want to keep it open to increase your overall available credit. However, weigh the pros and cons, as you'll also want to monitor the account for suspicious activity and avoid paying annual fees for a card you rarely use.

Consolidate Credit Card Debt

For cardholders paying down credit card debt, consolidating the debt with a personal loan could be a win-win. You may be able to get a personal loan with a lower interest rate than your cards have, which can save you money. And, because personal loans are installment loans rather than revolving accounts, the debt won't be considered in credit utilization calculations.

Monitor Your Credit and Utilization

While credit card utilization is an important scoring factor, you shouldn't let the fear of high utilization keep you from using your credit cards when you need to. If it's for an emergency purchase that you need to pay off over time, focus on paying down the balance as quickly as possible. Or, if it's because you want to earn rewards and use the cardholder protections, you can pay down your card's balance early. Whatever the case may be, you can monitor your Experian credit report for free and quickly check your overall and per-account utilization rates.

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