Guide to Credit Card Utilization

If you’re a credit card user—or if you’re just beginning to navigate the pitfalls of credit scores—you’re likely aware of the term “credit card utilization”.

Credit card utilization has nothing to do with how you spend your credit. Credit reporting agencies aren’t really interested in whether you’re spending money on shoes or gas (not in this credit score facet, anyway). Credit card utilization refers to HOW MUCH of your credit you spend.

Should you give two flying fish about your credit card utilization? Absolutely. It’s actually one of the most influential factors in determining your credit score—in both FICO and VantageScore scoring models.

Keep your credit score healthy! Read through our quick guide on credit score utilization:

• What is Credit Card Utilization?
• Credit Utilization Over Multiple Cards
• How Credit Card Utilization Affects Your Credit Score
• How To Improve Your Credit Card Utilization

What is Credit Card Utilization?

Remember the term, “revolving credit”? Revolving credit is a recurring loan where you can borrow up to a certain amount of money each month, so long as you’re regularly paying off the debt.

A credit card is a revolving line of credit. In this article, we’ll talk about credit utilization strictly through the lens of credit cards, but remember that credit utilization may refer to any type of revolving credit line.

Credit card utilization measures the amount of credit you use of your available monthly credit. It’s always measured in a ratio.

Suppose you have a credit card that’s capped at $10,000 per month. You use $2,000 of your available credit.

Do the math! All you’ve got to do is divide your used credit by your available credit. So, in this case:

2,000 (used credit) ÷ 10,000 (available credit) = .20

Move the decimal two places to the right (curse your elusiveness, elementary school math!) and you’re left with a credit card utilization ratio of 20%.

Not too difficult, right?

Credit Utilization Over Multiple Cards

If you have multiple credit cards, then your credit utilization would be calculated across all of them.

Let’s say you have three credit cards:

Card 1: $10,000 available credit

Card 2: $5,000 available credit

Card 3: $2,500 available credit

And let’s say that you’ve used $2,000, $500, and $1,000 on each card, respectively.

Add all the available credit—it totals at $17,500. Now add all the used credit—it totals at $3,500.

Now divide: 3,500 ÷ 17,500 = .20

So your total credit utilization would be 20%, which is good!

However, your credit score might still be negatively affected. Card 3 has a utilization ratio of 40%, which is higher than the suggested maximum.

Although it’s good to have a low total utilization, you might also want to keep the credit utilization of each individual card as low as possible, too. One card with a high utilization ratio could damage your credit score.

How Credit Card Utilization Affects Your Credit Score

“So what’s the big deal?” you ask yourself. “Won’t my credit score be in great shape so long as I’m not using more than my available credit?”

Not necessarily. Most credit reporting agencies advise you to keep your ratio as low as possible—the general consensus is that you should keep your credit card utilization below 30%.

One of the main purposes of a credit score is to evaluate the likelihood that you’ll promptly repay a loan. If you’re using a large percentage of your available credit, it may indicate that you’re doing so because you’re in financial distress and don’t have immediate funds to make payments. If you’re in financial distress, you may be considered less capable of loan repayment, and so your credit score might suffer.

On the contrary, using less of your available credit may indicate that you’re in better financial standing or that you have more responsible spending habits.

How To Improve Your Credit Card Utilization

Don’t panic—you’re not the only person who just calculated their credit score and gasped at seeing that their credit utilization ratio is over 30%.

We can help! We’ve listed five ways in which you can reduce your credit card utilization—which may help you boost your credit score. We listed them in order from simplest to most complex.

1. Keep credit usage as low as possible.

You might have guessed by now that keeping your credit usage as low as possible is key to maintaining a good credit utilization ratio (you’re becoming a credit utilization expert!).

How you go about this is entirely up to you, and entirely dependent on your spending needs and habits. Know how much your available credit is, and determine how much you can use before you cross the 30% threshold. Ideally, you could try and keep your credit usage at 20% or below. This may require some tight budgeting, but it could prove to credit reporting agencies that you have responsible spending habits.

If you have multiple credit cards, try and spread out your balances evenly across all of them. You don’t want one card to get stuck with a high utilization ratio.

2. Set up monthly alerts.

Digital technology makes it easier than ever to keep tabs on your credit utilization.

A great way to keep your credit usage in check is to set up monthly alerts with your bank or credit card issuer. You can have these financial institutions send you a digital alert when you’re about to go over a percentage of your credit usage.

Even with tight budgeting, it’s easy to lose track of your credit usage in all the frenzy of life. Monthly alerts are a simple tool that can go a long way in keeping your balances down.

3. Determine your lender’s billing cycle.

Your lender will issue financial reports to their credit reporting agency typically once per month. This information includes your credit utilization ratio.

Contact your lender and discern which day of the month they issue reports to their credit reporting agency. This is not purely advice for the overly-cautious consumer. It’s actually an important and often-overlooked factor that may significantly affect your credit score.

Many consumers assume that his or her lender reports on the first or last day of the month. But lenders may actually issue reports at any given time. This could result in your credit utilization being skewed.

For example, you assume that your lender reports on March 1st. You manage your credit usage so that from February 1st to February 28th, your credit utilization ratio is 20%.

In reality, your lender reports on February 15th. And, from January 15th to February 15th, you used credit that amounted to 45% of your available credit.

Ask your lender which day they report to their credit reporting agency so that you may accurately manage your credit utilization ratio.

4. Increase your credit limits.

Increasing your credit limit might be a good way to lower your credit utilization ratio.

If your available credit is $1,000, any balance over $500 may reflect poorly on your credit score—since that’s a credit utilization ratio of 50%. But if you increase your available credit from $1,000 to $5,000, your ratio nosedives from 50% to 10%.

Another advantage to increasing your credit limit is that you’ll have a higher amount of total available credit, which is favored by credit reporting agencies and may boost your credit score.

Think it over: applying for a credit increase typically results in a hard inquiry. Your lender will conduct a hard inquiry to evaluate your credit, since they’ll be granting you more money.

Hard inquiries may drop your credit score in the short-term. It should only drop by a few points, and if you manage your credit responsibly then your credit score should rebound quickly. Keep in mind that a low credit utilization ratio may significantly boost your credit score in the long-term—so a hard inquiry might be worth the brief and minor deduction in your score.

5. Open a new line of credit.

Opening a new credit card may boost your credit utilization ratio because the new credit will add to your total available credit.

You’ll still need to responsibly manage your credit usage to keep your ratio down. Don’t be tempted to use more credit just because you can.

If you only have one credit card, you might consider opening another one. Having multiple credit cards can help you sustain a low credit utilization ratio. In addition to boosting your total available credit, multiple cards may help you balance expenses.

For example, unexpected emergency expenses could severely balloon your credit usage. If you go to the hospital, or if you have to take your car into the shop, then you’ll have to pay those bills on your credit card if you don’t have the immediate funds in your bank. If you only have a single credit card, those expenses could cause your credit utilization ratio to shoot much higher than 30%.

But if you had multiple cards, you could spread out the expenses among different accounts.

Note: Give it some thought before you open a new credit card. Opening a new line of credit will result in a hard inquiry that may temporarily drop your credit score.

6. Monitor your credit.

As previously mentioned, you may be able to improve your credit utilization ratio by either increasing your credit limits or by opening a new line of credit. However, both of these options do pose their own risks that may negatively affect other aspects of your credit score. You should only exercise them if you’re in appropriate financial standing to do so.

Consider using a credit monitoring service like Turbo. These services will track your credit standing and evaluate which aspects of the credit scoring process are positively and negatively affecting your score. They’ll help you not only track your credit utilization ratio, but they’ll also help you gauge whether or not you should those kinds of financial decisions.

Remember that when it comes to credit scoring, one size does not fit all. Having a detailed understanding of your credit and personal finances may help you make the right credit card-related choices.

To summarize:

Credit card utilization measures the amount of credit you use of your available monthly credit. It’s always measured in a ratio.

You can improve your credit utilization ratio by:

1. Keeping credit usage as low as possible.
2. Setting up monthly alerts.
3. Determining your lender’s monthly billing cycle.
4. Increasing your credit limits.
5. Opening a new credit card.
6. Monitoring your credit.

Now get out there, get spending – just do it wisely.