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You probably already know that making credit card payments on time is key to building a great credit score. But did you know that credit card utilization—how much of your available credit you're using at any time—is a major factor as well?
In 2020, despite the pandemic, average credit card balances dropped by 14%, according to Experian data. This brought credit card utilization rates down and helped contribute to a record rise in U.S. consumer credit scores. Higher credit scores can give you access to the best credit cards and loan rates, helping to reduce the cost of borrowing money and land you extra benefits you might not qualify for otherwise.
A good rule of thumb when it comes to your credit card utilization ratio is that lower is better (think under 10%). Keeping your utilization under 30% is often essential to maintaining a good credit score or better.
What Is the Best Utilization Ratio?
Your credit card utilization ratio refers to how much available credit you're using compared with how much you have access to. When credit scoring models such as FICO® consider your credit utilization, they look at individual credit cards as well as overall utilization across all your cards.
A quick way to calculate your utilization ratio is to divide your card's balance by its credit limit, then multiply that number by 100. Let's say you have a credit card with a $3,000 limit and your current balance is $1,000. Divide $1,000 by $3,000 and you get 0.33. Then, multiply 0.33 by 100, and you have a 33% credit utilization ratio.
There's no single best credit utilization ratio, but a per-card ratio as well as a total ratio of under 10% indicates optimal credit card management. If that's not possible, it's best to aim for 30% or lower. As your credit utilization ratio increases, your credit score may drop and lenders may see you as a potentially risky borrower.
Why? If you already owe thousands of dollars to other creditors, a lender may be concerned that you won't be able to handle monthly payments on a new account. Additionally, running up high balances, which often translates to high utilization, could indicate a money management problem that might prevent you from paying your debts on time.
Experian data shows that consumers with exceptional FICO® Scores☉ (800 to 850) had an average credit utilization ratio of 5.7%. Those with very good credit (740 to 799) averaged 12.4% utilization ratios, while those with good scores of 670 to 739 came in at an average of 32.6%.
|Average Credit Utilization by Credit Range|
|FICO® Score Credit Range||Average Credit Utilization Ratio|
Source: Experian data from Q3 2020
How Does Credit Card Utilization Affect Credit?
Credit utilization is a major factor in a scoring category that makes up 30% of your FICO® Score, the score most often used by lenders, so it's an important factor to monitor. Only your payment history is weighted more heavily in determining your score.
Your credit score reflects your overall credit management as well as what's happening with each of your credit cards and other lines of credit. This means that even if you have one account with a balance nearing your credit limit but three others with low balances, that one account could hurt your credit score.
That doesn't mean you need to keep your credit card utilization at a constant 0%, however. While using your credit card and paying off its balance every month is good for your credit score, never using your cards won't do much to help it—and could result in your lender closing your account.
How to Lower Credit Card Utilization Rates
Once you calculate your credit card utilization ratio on a per-card and overall basis, you can focus on lowering your balances and then maintaining your new, lower ratio. Here are some ways to do it:
- Use your credit cards less. Unless you're in the habit of paying off your balances in full each month, you may want to use a debit card or cash for more of your purchases if possible. This will help you stay on your budget and avoid your balances creeping upward.
- Make monthly payments as early as possible. Paying your bills well before the due date is a way to avoid accidentally missing the deadline and accruing late fees that only increase your balance. Early payments can also help boost your credit score, especially if you pay down your balances before your statement closing date. Doing so means you'll have a lower balance when your score is calculated, so it's a good idea to pay your bills as soon as you can—or even in smaller increments throughout the month—rather than waiting until your due date.
- Keep credit cards open. Even if you've stopped using a particular credit card, you may want to keep it open to improve your utilization rate. The more available credit you have that isn't being used, the higher your ratio will be. Use the card at least occasionally for small purchases that you pay off right away to ensure the lender doesn't close your account.
- Increase your credit limits. A higher credit limit can be a great way to improve your utilization numbers, as long as you're not tempted to use too much of the credit line. Credit card issuers will sometimes automatically increase your limit if you make payments on time and keep low balances. But you can also proactively request an increase by contacting your creditors directly.
You can take some of the guesswork out of where your credit score stands by signing up for Experian CreditWorks℠. The free service provides your credit score for free, tracks activity on your Experian credit report, and alerts you to changes in your utilization ratio and your account balances. Although you may not be able to lower your utilization numbers immediately, consistently paying what you can and tracking your progress will help you raise your score over time.