Credit Card Utilization: How Balance Affects Your Credit Score

What is credit utilization ratio?

Credit utilization is the amount of revolving credit you are using divided by the total revolving credit available, expressed as a percentage. Revolving credit includes credit cards and other accounts that allow you to borrow up to a set limit and pay back over time. Your utilization ratio is calculated from the balances and credit limits reported on your credit report, which may differ from your current limits and balances.

• Formula: Total outstanding balances ÷ Total credit limits × 100.
• Utilization is a key factor in many credit scoring models, including FICO and VantageScore.

Sources: Experian, Chase, Community First Credit Union, FinMkt

How utilization affects your credit score

Credit utilization can affect around 20% to 30% of your credit score depending on the scoring model. A lower utilization generally indicates you're using less of your available credit, which is seen as less risky by lenders. Conversely, higher utilization can signal financial strain and can lower your score.

Data from Experian shows that people with higher credit scores tend to have lower utilization. In Q3 2024, consumers with exceptional credit scores (800-850) had an average utilization of 7.1%, while those with very good scores (740-799) had 15.2%. Good scores (670-739) averaged 38.6%, fair scores (580-669) 61.4%, and poor scores (300-579) 80.7%. This pattern demonstrates how utilization and credit scores often move together.

Sources: Experian

Ideal utilization range and thresholds

There is no precise point where utilization goes from good to bad, but 30% is often cited as the threshold where it starts to have a more pronounced negative effect on credit scores. The Consumer Financial Protection Bureau recommends keeping credit use below 30% of your credit limit. However, a lower rate is generally better. Experian data shows that people with the highest credit scores (800-850) tend to keep utilization in the low single digits.

It's also important to note that scoring models may consider the highest utilization rate on an individual account in addition to the overall utilization rate. That means carrying a high balance on one card can hurt even if your overall utilization is low.

Sources: Consumer Financial Protection Bureau, Experian, Bankrate

Strategies to lower your utilization

Two primary ways to lower your credit utilization are decreasing your balances and increasing your credit limits. Reducing the amount you owe is the most direct approach, but you can also manage the timing of your payments and other factors.

Credit card issuers usually report account information, including balance and credit limit, to credit bureaus around the end of each statement period. Therefore, paying your balance before the statement closing date can lower your reported utilization. Making multiple payments throughout the month can also help keep your reported balance low.

If you have unused credit card accounts, keeping them open helps maintain your available credit and avoids increasing your utilization ratio. Closing a credit card account can increase your utilization because it reduces your overall available credit.

• Pay down balances over time.
• Request a credit limit increase if you don't plan to spend more.
• Consider using a personal loan to pay off credit card balances—installment loans are not included in utilization calculations.

Sources: Experian, Chase, FinMkt

How to calculate utilization for multiple cards

To calculate your overall utilization, add up the balances on all your revolving accounts and divide by the total of all your credit limits, then multiply by 100. This is the figure that most scoring models use.

You can also calculate utilization for individual cards, which may be used to assess risk. If you have multiple cards, keep each card's utilization low, not just your overall utilization, because models may consider both.

Sources: Experian, Chase

Common myths about utilization

There are several misconceptions about credit utilization. One myth is that you need to carry a balance to build credit—that is false. In fact, carrying a balance can increase your utilization and cost you interest.

Another myth is that using 0% utilization is ideal. However, a 0% utilization rate can actually be worse than 1% for credit scores because 0% does not show how you manage credit. Reporting a small balance, like 1%, demonstrates that you can use credit responsibly.

Some people believe that checking your credit score lowers it, but that is not directly related to utilization. Also, many think that closing a card will automatically remove the credit limit from your utilization calculation—it does, but that can increase your ratio, which is often counterproductive.

Sources: Experian