Understanding Credit UtilizationAnd How to Lower It: A Guide

What is Credit Utilization?

Credit utilization refers to the amount of revolving credit you are currently using compared to the total amount of revolving credit available to you. It's primarily calculated based on your credit card balances versus your credit card limits.

It's expressed as a percentage. For example, if you have one credit card with a $1,000 limit and a $300 balance, your utilization on that card is 30% ($300 / $1,000).

Scoring models look at both your utilization on individual cards AND your overall utilization across all your revolving accounts.

Why Does Credit Utilization Matter So Much?

Lenders see high utilization as a sign of potential financial distress – it suggests you might be overly reliant on borrowed money and could have trouble repaying debts. Conversely, low utilization suggests you manage credit responsibly.

• Significant Score Impact: Utilization accounts for about 30% of typical FICO scores. Lowering high utilization can often lead to relatively quick score improvements.
• Indicator of Risk: High balances increase the perceived risk for lenders when considering you for new credit or loans.

How is Utilization Calculated?

Credit scoring models typically calculate:

• Per-Card Utilization: The balance on each individual credit card divided by its credit limit.
• Overall Utilization: The sum of all your credit card balances divided by the sum of all your credit card limits.

Important Note: Most credit card issuers report your balance to the Credit Bureaus once a month, usually based on the balance shown on your statement closing date. This means even if you pay your bill in full by the due date, a high balance might still be reported if you made large purchases before the statement closed.

What's a Good Utilization Ratio?

While there's no single magic number, lower is generally better. Here are common guidelines:

• Excellent: Below 10%
• Good: Below 30%
• Fair/Poor: Above 30% (Scores tend to drop more significantly as utilization climbs higher)

Aim to keep both your individual card utilization and your overall utilization below 30%, and ideally below 10% for the best impact on your scores.

Actionable Steps to Lower Your Utilization

Here are effective strategies:

• Pay Down Balances: This is the most direct method. Focus on paying down the cards with the highest utilization percentages first. Prioritize paying more than the minimum payment.
• Make Payments Before the Statement Closing Date: Since issuers usually report the statement balance, making a payment *before* the statement closes can result in a lower balance being reported to the bureaus, thus lowering your utilization for that cycle. Check your statement for the closing date (it's different from the due date).
• Request Credit Limit Increases: If you have a good payment history with a creditor, you can request a credit limit increase on an existing card. If approved, this increases your available credit, which can lower your overall utilization percentage (assuming your balance stays the same). Be aware this might sometimes involve a hard inquiry.
• Open a New Credit Card (Use Cautiously): Opening a new card increases your total available credit, which can lower overall utilization if your spending doesn't increase proportionally. However, this also involves a hard inquiry and adds a new account, which can temporarily lower your score slightly. This is generally a longer-term strategy.
• Keep Unused Cards Open: Unless a card has a high annual fee, keeping unused credit cards open (with zero balances) helps maintain your total available credit, which benefits your utilization ratio.

Tip: Use a credit monitoring service or check your credit card statements online to track your balances and credit limits regularly.