What Is Credit Utilization?

Your credit utilization is a percentage of how much credit you’re using compared to your total credit limit. It’s an important credit score factor, so knowing how to calculate and monitor it is useful to build and maintain a good credit score.

Learn more about why credit utilization impacts your credit score, how to calculate your credit utilization and what you can do to pay down debt and improve your credit health:

How to calculate your credit card utilization

Your credit utilization rate looks at the available credit limit of your revolving accounts, like credit cards, and compares it to how much of it you’re actively using. To calculate your credit utilization rate, divide the combined balances on each of your revolving credit accounts by how much available credit you have access to on those accounts (your total credit limit).

Here’s an example:

• You have four credit cards and each one has a credit limit of $2,500
• 4 cards x $2,500 = $10,000 total credit limit
• The balances across all those cards combine to $3,000
• $3,000/$10,000 x 100 = 30%

Why does higher credit utilization decrease your credit score?

Your credit score, which is a snapshot of your credit health, is based on certain information in your credit report. To create a credit score, credit scoring models look at relevant information in your credit report and place it into credit score factors.

There are different credit scoring models. While not all credit scoring models are the same, factors generally overlap. Factors don’t all have the same influence on your credit score — some factors are more important than others. For example, your payment history and credit usage are two of the most important factors for the VantageScore^® 3.0 credit scoring model. When you get a score from TransUnion^®, it’s a VantageScore^® 3.0 credit score.

The credit usage factor makes up 34% of your VantageScore^® 3.0 credit score. Credit usage is made up of three different parts: your credit utilization (20%), total balances (11%) and available credit (3%). 

Higher credit utilization can negatively impact your credit score because it may signal to lenders and scoring models that you are relying heavily on credit.As you pay down your balances and your utilization improves, you should see an improvement in your credit score. A lower utilization rate shows you’re able to manage your debt well.

What is a good credit utilization rate?

Popular advice is to keep your credit utilization rate below 30%, but the lower the better. As your credit utilization decreases, it will benefit your score. If you actively use your credit cards and frequently pay them off, your credit utilization rate will fluctuate.

Your credit score is derived from information in your credit report, so when you check your credit score, it will reflect the latest information provided by creditors in your report.

Should I keep my credit card balance at zero?

You don’t have to keep your credit card balance at zero to maintain healthy credit. If you’re consistently making on-time payments and are paying your balance off in its entirety each month, your credit score will benefit.

You can use your available credit as you need it, but just know the potential impacts to your credit score when you carry large balances. For instance, if you made a big purchase but didn’t pay off the balance in full before the card issuer reported it to the credit reporting agencies, your credit utilization rate may be temporarily elevated. If you pay off the balance and maintain a low utilization rate, it should be reflected in your credit report the next time the credit card company provides an update.

How to lower your credit utilization

Because it’s an influential credit score factor, lowering your credit utilization  is an important step to achieving healthy credit. This makes sense, as not carrying large balances can show you’re able to able to manage debt well. However, not everyone who has a high utilization rate is spending recklessly. Sometimes bills can add up, such as an unexpected house expense, necessary car repair, or a medical bill. No matter how or why your balances grow, it’s important to pay them off as quickly as you can. Here are some things to consider:

Limit credit card usage

Sometimes, the best way to limit credit card debt is to start at the source. If you can, stop using your credit cards for your purchases, unless you know you can immediately pay off your credit card balances. It can be difficult to avoid accruing debt on credit cards, especially if you’re struggling financially. But if you can, limiting your credit card transactions to only what you can afford can help put a stop to additional, high-interest debt accruing.

Consider keeping cards active

You don’t necessarily need to close your credit card accounts to lower your credit usage; in fact, it may hurt it. Part of your credit score is based on credit depth, which looks at the age of your oldest account, the age of your youngest account, and the average age of your accounts Older accounts in good standing can help your credit score because they show you can responsibly handle credit for a long time.

Closing an account, especially if it has a long history, may decrease the average age of your accounts and negatively impact your credit score. Also, if you have an older credit card that has a high annual fee, it may be worth closing, especially if you’re not going to use the card anymore. But if your card has no annual fee, you may want to consider leaving the account open to avoid decreasing the average age of your accounts.

Increase your credit card limit

You can ask your credit card issuer to increase your available credit. If your balances remain the same and you have a higher credit limit, it should lower your credit utilization. But there are a couple important things to note with this strategy:

• Asking for an increase to your credit limit could trigger a hard inquiry, which may temporarily lower your credit score. However, some lenders only initiate soft inquiries for credit line increases. Soft inquiries do not affect your credit score. The inquiry policy for credit limit increases can vary by lender. 
• Be sure to talk to your lender prior to requesting a credit line increase so you understand any potential impact to your credit score.
• It’s important to be  mindful of your spending behaviors. If you’ve increased your credit limit, you now have more room on that card to spend. If you then spend more on the card, your credit utilization will increase again.

Create and follow a budget that cuts down spending

If you haven’t created a budget before, you’ll need to take a good look at all your spending. See where your money is going and put your expenses into categories. Your bank may have budgeting software built into their online platform, but there are also many apps that can help you as well.

This seems simple, and it can be, but it can also be illuminating. Sometimes spending just gets away from us and we develop money leaks. These could be accounts or services you forget about, where little by little, your money is siphoned from your bank account.  Think unused subscriptions, memberships and the like.

When it comes to cutting back, focus on large categories of spending that bring you little value and see if there are purchases you can cut. Our blog post, How To Build a Budget That Works for You, can give you some budgeting techniques.

Create a debt payback plan

After you see where your money is going and find some ways to cut back, you’ll need a plan for that money. Start by listing out all your current debt and the interest rates; this can give you a plan of attack. Making extra payments to outstanding credit card debt is often a smart first move because interest rates on credit cards tend to be higher than other forms of debt. The order in which you choose to pay back your credit cards and other debt will depend on your preference.

One repayment strategy is a mathematical approach, which means paying back the highest interest rate first. This should theoretically save you the most money. But some people like to start with the lowest balance first, because it gives them some quick wins and keeps them motivated.

It’s up to you to decide what approach is best for your circumstances. Ultimately, what’s important is that you continue to make at least the minimum payments on all your credit cards. If you don’t, this could lead to a missed payment appearing on your credit report. Since your payment history is the most influential credit score factor, maintaining a positive payment history is important.

Credit utilization rate is one of those credit terms that may seem confusing at first, but is quite simple when you get the hang of it. The more you check your credit score and read your credit report, the easier it is for you to manage your credit health. You can get free credit reports each week from the three nationwide credit reporting agencies (TransUnion, Equifax, Experian) at annualcreditreport.com.

You can also get free daily refreshes of your TransUnion credit report and credit score with TransUnion's free credit monitoring subscription. There is no credit card required to sign up. Learn more about your credit report options on our free credit report page.