The lower your credit utilization — meaning the less of your total available credit you’re using — the higher your credit score could be. Typically, the rule of thumb is to use no more than 30% of your credit limit on your credit cards, and using only 10% or less is considered even better.
Here’s a closer look at how credit utilization affects credit score, from how much lowering your credit utilization will affect your score to how long credit utilization affects a score.
What Is Credit Utilization and Why Does It Matter?
Credit utilization is the percentage of your overall credit limit that you use on your revolving credit accounts — most commonly, credit cards. In other words, it’s how much of your available credit you’re using.
Credit utilization is one of the most important factors that scoring models look at when calculating your credit score, since it suggests the risk you could pose as a borrower. The lower your credit utilization, the more it will appear that you can handle debt or use a credit card responsibly. Thus, a lower utilization rate can contribute to a higher credit score.
To calculate your credit utilization, add up all of your credit card balances and then divide that amount by your overall credit limit across your credit cards. You would then multiply by 100 to express the ratio as a percentage.
Here’s an example:
• Say you have three credit cards, with an overall credit limit of $15,000.
• Next, imagine you’re carrying a balance of $4,000 across all of those cards.
• Using the previously explained equation, you divide your total balance of $4,000 by $15,000, and then multiply by 100.
• Your credit utilization would be around 26.7%.
Factors That Affect Your Credit Score
Aside from your credit utilization, there are other factors that affect your credit score. These include:
• Payment history: Another major factor aside from credit utilization is whether you pay your credit and debt accounts on time, meaning by the payment due date. If you consistently make on-time payments, the more creditworthy you’ll appear, and this will reflect on your score.
• Credit history length: Credit scoring models typically take into account how long your current accounts have been open. They may even consider how long it’s been since you’ve used certain kinds of accounts. Generally, a longer credit history is a positive thing for your credit score.
• Credit mix: Having different types of accounts may demonstrate to lenders how you handle different kinds of debt and can have a positive impact on your score if you manage your debts well.
• New credit: Opening multiple credit accounts or having a series of hard inquiries could signal to lenders that you pose a greater risk as a borrower. As such, it may negatively impact your credit score.
How Credit Utilization Affects Your Credit Score
Your credit card utilization accounts for 30% of your FICO® credit score, which is the scoring model used by the majority of lenders.
Since lenders look at your credit score to assess your creditworthiness, having a low credit utilization is key. That’s because if you’re using most of your available credit, it suggests to lenders that you could be a greater risk. A high utilization rate could signal to lenders that you may be stretched too thin financially and need to rely too much on credit. You might therefore have a hard time paying back what you borrow.
Your credit score is also dependent on other factors, such as the number of credit cards you have. For example, if you have one credit card with a low limit, having a high credit utilization may affect your score more compared to someone with multiple credit cards, all of which have high credit limits. Same goes for someone with a lengthy credit history that’s been mostly excellent, compared to someone who has no or a limited credit history.
In other words, credit utilization is an important factor in determining your credit score, but there are other aspects as well, such as your payment history.
Tips for Managing Your Credit Utilization and Credit Score
By managing your credit utilization, you can positively impact or maintain a better credit score. The following are a few effective tactics to do so.
Keeping Your Credit Utilization Rate Under 10%
Though keeping your credit utilization under 30% can help to positively impact or maintain your credit score, the lower it is, the better.
While you may be tempted to keep it at zero, that may not be as helpful as you think. A 0% credit utilization could signal that you’re not using your credit regularly. Since lenders want to see how you currently manage accounts, it will be hard to approve you for a loan if they see you’re not using any.
Instead, consider charging smaller amounts on your credit card and trying to keep your utilization rate to under 10%, which is a benchmark for achieving a high score. That way, you should be able to afford to pay the balance and show creditors you’re using credit regularly.
In addition to keeping your overall utilization below 10%, you’ll want to make sure that your utilization on each of your credit cards is also below that percentage. In many cases, credit utilization may refer to your per-card utilization.
Your best bet would be to look at your current limit for your cards and then aim to keep each credit card balance to no more than 10% of that amount. So if you have two credit cards with limits of $3,000 and $5,000 respectively, you wouldn’t want to charge more than $300 to the first card and $500 to the second.
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Asking for a Higher Credit Limit
Getting a higher credit limit can lower your credit utilization even if you maintain the same balance on your cards. It also gives you more wiggle room — if you need to carry a balance on a credit card, you won’t have to worry as much about a big increase in your credit utilization.
When it comes to asking for a credit limit increase, issuers tend to look more favorably to those who have maintained good credit history, whose income went up, and even those who have less debt. If you do make a request, some credit card companies may conduct a hard credit inquiry, which could temporarily (and slightly) lower your credit score.
Making Payments Twice in a Month
By paying your credit card twice a month, your balance will remain lower. It will also increase the chances of your credit card issuer reporting that lower amount to the credit bureaus. You may hear this method referred to as the 15/3 credit card payment method.
This could mean that your calculated credit utilization is lower, which could help build your credit score. Plus, it will help you avoid racking up excessive credit card debt, which can have a negative impact on your score.
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Keeping Your Credit Cards Active
It may be tempting to close a credit card that you don’t use anymore. However, if you do so — or if you don’t use a credit card for a while and the card is closed automatically — your credit utilization will automatically go up. This is true even if your balance is still the same, as your overall credit limit is now lower. In addition, your credit history could be shortened, which may lower your credit score.
Instead, consider keeping that card open, even if you make a small purchase on it every few months.
The Takeaway
Credit cards are useful tools, helping you make purchases, earn rewards, and possibly build your credit. In order to reap these benefits, make sure to use your credit cards responsibly — including by keeping your credit utilization low. Given how significantly credit utilization affects credit score, it may be worth exploring ways to manage your current utilization in order to lower it.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
What is a good credit utilization ratio?
A good credit utilization ratio is 30% or lower. Ideally, you should aim to maintain a credit utilization ratio of around 10% to show lenders you’re responsible with credit.
How long does credit utilization affect credit score?
Your credit utilization is a key contributing factor to your credit score. However, a high utilization rate won’t affect your credit score forever. As long as you take the steps to lower it, you can see positive effects within a short amount of time; say, a couple of update cycles after you bring it down.
How much will lowering my credit utilization affect my credit score?
Lowering your credit utilization can have a significant impact on your credit score. That’s because credit utilization makes up around 30% of your credit score calculation with most scoring models.
Photo credit: iStock/Ridofranz
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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