How too much credit utilization affects your credit score | finder.com
Credit utilization ratio credit score

Your credit utilization ratio is one of the biggest factors in calculating your credit score

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Keeping or improving a good credit score can be a tricky balancing act. Your creditworthiness involves many different factors, from the amount of credit that you have to the types of credit and more.

But none are as important as your credit utilization ratio.

Credit utilization ratio definition

Your credit utilization ratio — also known as debt-to-limit — is calculated by dividing your balance on existing credit cards by your available credit limits. Here’s how to figure it out:

  • Add up all of the balances on your credit cards.
  • Add up the credit limits on all of your credit cards.
  • Divide your total balances by your total limit to find your ratio.

For instance, if you have $3,000 limit on all of your credit cards and you have a balance of $1,500, your credit utilization ratio is 50%.

Most experts will tell you to keep your ratio below 30% on any account.

How does my credit utilization ratio affect my credit score?

The major credit bureaus — Equifax, Experian and TransUnion — use proprietary formulas to analyze your credit history and come up with your credit score. But there is a strong correlation between a high credit utilization ratio and low credit score.

If you owe more than 30% on any one credit card at any point during your monthly billing cycle, it could result in a lower credit score, even if you pay off your balances each month. Every month, your credit card issuers report your balances to the credit bureaus.

However, credit bureaus calculate your scores only as requested. If a request comes in just after you’ve made charges that resulted in a higher credit utilization ratio, you could see a drop in your score.

What’s my credit score?

How does a credit utilization ratio fluctuate?

Your credit utilization score increases and decreases with the fluctuating balances on your individual cards.

Balance and limitUtilization score
If you have a balance of $600 on a card with an $800 limitYour utilization score is 75%.
If you have a balance of $225 on a card with a $1,500 limitYour utilization score is 15%.
If you have a balance of $350 on a card with a $1,000 limitYour utilization score is 35%.

Using these examples, you’ll see that the middle ratio is ideal, because it’s under the 30% threshold. The bottom example is close but it could damage your score given that it’s higher than 30%, even if only by 5%. That top example at 75% is a number you want to avoid.
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Can I use my credit utilization ratio to improve my credit score?

Yes — but only if you know how. The simplest thing is to keep an eye on your balances, ensuring that they are under 30% of your limit. However, there are a few workarounds.

Opening another credit card

It may sound counterintuitive, but opening another credit card could improve your credit utilization ratio, which in turn could increase your credit score.

If you plan on using this strategy, steer clear of store credit cards as they typically come with low credit limits which could be maxed out in just one shopping trip.

Increasing your credit utilization ratio

When you open up a balance transfer credit card, your credit utilization ratio goes down. Here’s how:

  • You have a $500 balance on your current card. This card has a $1,000 credit limit. Right now, your credit utilization ratio is 50%.
  • You transfer that $500 balance to a new card with a $1,000 credit limit.
  • Now you have a $2,000 limit spread between the two cards with a balance of $500, which brings your credit utilization ratio down to 25%.

This new credit utilization of 25% is certainly a better ratio. However, be cautious with this approach: A new credit card can reduce the average age of your credit accounts and around 15% of your credit score depends on credit age.

Paying balances twice a month

Another way that you can improve your credit score is to pay off your balances mid-cycle, instead of waiting for the due date each month. Paying balances down twice a month will keep your credit utilization ratio below the 30% threshold — especially when you know when your credit card issuers report information to each of the credit bureaus.

It’s time-consuming, but you can find this out by calling the customer service number for each of your cards. Once you know when they report in, you can ensure that you credit utilization ratio is below 30% by that time.

Ask for a credit limit increase

By gaining access to a larger line of credit, you’ll be effectively increasing your total credit limit and reducing your credit utilization ratio.

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When does my credit utilization ratio matter the most?

You’ll need to consider two important elements: balance transfers and new credit.

Balance transfers

It makes sense to transfer the balance from a card with a high interest rate to a low interest rate credit card because you can save money on that in the long run.

However, depending on the amount that you’re transferring, you may go over the 30% utilization ratio. To avoid dinging your credit, transfer only as much as your situation requires.

New credit

If you are new to credit, charging items to your credit card and paying them off a little each month could help you set up a good payment history. But large balances can increase your credit utilization ratio, particularly if you have multiple credit cards with balances.

Try to keep your balance under 30%, and pay slightly more than the minimum for a month or two. This will help you build a credit history with a better score.

Bottom line

The goal of a better credit score may seem like an unattainable feat, but it’s doable. By understanding the importance of your credit utilization ratio, you can improve it by using strategies that can positively affect your score in the long term.

Adrienne Fuller

Adrienne Fuller leads the publishing team at finder.com. She has one goal: to deliver the accurate and transparent information she wishes she had when she made some of life's important financial decisions. When she's not helping folks save money, she's hiking with her two Catahoulas around her home in San Diego.

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4 Responses

  1. Default Gravatar
    LauraApril 16, 2018

    Hi.

    Im trying to improve my credit score. Have a capital one card with £200 limit.
    Ive just been accepted for a platinum card with £3,000 limit and low apr.
    Is it better to close the capital one card or keep it to improve my score? Thanks

    • Staff
      JoanneApril 16, 2018Staff

      Hi Laura,

      Thanks for reaching out.

      Using your credit utilization ratio is one of the ways to improve your credit score. The thing to do is to keep an eye on your balances, ensuring that they are under 30% of your limit.

      Meantime, when you close a credit card, the amount of credit available to you goes down — causing your credit utilization to go up. Closing an old credit card can make your credit history seem shorter than it actually is, lowering your credit score slightly.

      Hope this helps,
      Joanne

  2. Default Gravatar
    ChristinaMarch 10, 2018

    Two questions

    1. Let’s say I use my credit card for a $300 couch on day 1, pay it off on day 2. Then on day 5 I use my credit card for a $300 fridge. The rest of the month I don’t purchase anything using my credit card. Let’s say I have a Max credit limit of $1000. Does this mean my credit utilization is 30% or 60%?

    2. Let’s say I use my credit card for 1 month and spend $500. If I pay off the $500 on the last day of the month, is this good or bad? Do you need some of the credit you owe to roll over to the next month to establish a credit history? Would I have better credit if I rolled over $100 compared to $1 I would owe?

    • Staff
      MayMarch 19, 2018Staff

      Hi Christina,

      Thanks for your questions.

      For your first question:
      Essentially, your credit utilization rate is determined by how much debt you are carrying against your credit limit. So if you’ve paid off the first $300 in your account as early as the next day and your card issuer will roll that $300 back to the $1000 limit you have, your utilization will only be 30% if you charged another $300 (with no other purchases) and have not paid that back until your due date.

      For your second question:
      1. Let’s say I use my credit card for 1 month and spend $500. If I pay off the $500 on the last day of the month, is this good or bad?
      When you are paying off all your balance before your statement closing date, that can benefit well to your history and credit score.

      2. Do you need some of the credit you owe to roll over to the next month to establish a credit history? Would I have better credit if I rolled over $100 compared to $1 I would owe?
      Basically what affect your credit history/score are the negative behaviors such as not paying your bills and debts on time and applying for so many other forms of credits in just a short period of time. Moreover, owing more than 30% of your credit card limit could also result to a lower rating even if you pay off your balances each month.

      Please note though that credit card companies generally report to the credit agencies once a month. They’ll will report to the bureaus whether your account is in good standing and whatever balance you have on the card. So generally, your score is calculated based on the information you have in your file.

      Cheers,
      May

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