How to Master Your Credit Utilization Like A Pro

We all know the importance of having a good  credit score. It’s more than just a number – it’s a representation of how reliable of a borrower you are, and how well (or poorly) you manage your debt. And just like your SAT scores back in high school, it can spark judgment.

While most people know that having a good or excellent credit score (which ranges from 720 to 780 and 781 – 850, respectively) is important to your financial health and that it can determine how prospective lenders and landlords use your score as a make-or-break sign of whether you’re in good financial standing (or not). But what about your credit utilization ratio? How does that affect your finances?

Ok, But What Is It?

Your credit utilization ratio is the amount of credit you’re currently using divided by the total amount of credit you have available. It’s the relationship between the balances on your credit cards and the credit limits on all of your open credit card accounts.

Here’s an example. Let’s say you have two cards: For Card 1, you have a balance of $1,000 and a credit limit of $10,000. For Card 2, you have a balance of $4,000 and a credit limit of $5,000. So, when we add up the balances, we get $5,000 ($1,000 + $4,000). Adding up the credit limits gets us $15,000 ($10,000 + $5,000). So, the utilization rate is $5,000 / $15,000 or approximately 33%.

According to FICO, the consumers who have the highest scores in the country (760 and above) have an aggregate utilization of 7%. Generally the lower the ratio, the more points you’re going to earn in your score. Pro tip: your credit score may take a hit if your credit balance is more than 30% of the available limit.

Credit card utilization is one of the most important credit score-related topics, and also one that’s often misunderstood. This complicated equation, also called “revolving utilization,” is an important factor in your FICO credit score, especially around the “Debt” category.

I Have Multiple Cards, How Do I Calculate My Total Ratio?

The first way to calculate your credit card utilization is by doing so for each one of your cards – aka Line Item – utilization. This includes each of your credit cards, retail store cards and gasoline cards, as long as they have revolving terms, meaning you don’t have to pay them in full each month.

Each of those cards has a credit limit, which is the highest amount that can be charged on that card. You can find the limit by looking at a statement or by calling the credit card issuer, or looking at your credit report. You can get the limits from your credit report (because that’s how credit scores calculate utilization) but they aren’t always accurate!

For every card that has a balance (meaning the cards that you got a bill for this month), divide that balance by the credit limit. Then, multiply that figure by 100 and you’ll get the utilization percentage on that card. So, if you have a $50 balance and a $500 credit limit you’ll get 10%. Remember: your goal is to have the lowest possible percentages, and as long as a balance is showing up on your credit report, then you will have a utilization percentage greater than 0.

Another method for calculating aggregate utilization is similar to Line Item utilization except for one difference: you’ll  need to add together all of the balances on your credit cards and all of the credit limits as well. Then you’ll divide the aggregate balance by the aggregate limit.

Now, it’s important you include ALL of your cards here – and just because you have a credit card that doesn’t have a balance doesn’t mean it won’t count. You’ll still include the credit limit, which will help your percentage.  This is the number one reason you might want to avoid closing credit card accounts even if you don’t use (or want) the card any longer. The unused limit will help your utilization percentage in the long run.

How Do I Become a Master?

One way to keep your utilization rate low is by increasing your credit limits. If your spending stays the same and your credit limit increases, the spending will be a lower percentage of your credit limit as a result.  Some will be wary of this step, and if you know that increasing your credit limit will tempt you to spend more than you otherwise would, it may not be the best choice for you. If you do choose to request a higher credit limit on a card, just know that the request may involve a hard inquiry, which in turn, may have a negative effect on your credit health.

Just like any part of your finances, you need to stay organized, and keep tabs on how you’re doing on a regular basis. If you have multiple cards, set up monthly check ins to make sure you’re tracking how much money you’re charging to each, and not spending more than you have. These check ins are also a good opportunity to look ahead to any big expenses you have in the coming months, such as a vacation, car repair, or home improvement project that may drive you to put more on your credit card than you normally would.

Jane Hamilton is the marketing manager for Intuit’s financial health platforms, Mint and Turbo. With a varied background in media, she has a wealth of knowledge on how to build/rebuild credit scores and manage debt. Jane is passionate about helping readers get on the path to their debt free day.