Credit Card Utilization, Defined and Demystified

photo: BigBeaks

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 incredibly important factor in your FICO credit scores. Grab your credit reports and a calculator as I walk you through it.

Credit card utilization is the relationship between the balances on your credit cards and the credit limits on all of your open credit card accounts.  It is expressed as a percentage and is calculated a number of ways.  It’s so important that it is a key factor in the “Debt” category of your FICO credit score.  The debt category is worth 30% of your FICO score points and while the credit card utilization percentage isn’t alone worth all 30% (that’s a myth), it’s certainly key to earning and maintaining great scores.

Line Item Utilization – Calculate this first

The first way to calculate your credit card utilization is by doing so for each one of your cards.  So, go grab each and every one of your credit cards, retail store cards and gasoline cards and make a stack.  As long as they have revolving terms, meaning you don’t have to pay them in full each month, they need to be in your pile.

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, you can look at your credit report.  Getting the limits from your credit reports is the most important method (because that’s how credit scores calculate utilization) but they aren’t 100% accurate 100% of the time.

For every card that has a balance (meaning you got a bill 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%.  Your goal is to have the lowest possible percentages.

Now, you’re going to be tempted to cheat.  Just because you already did or plan to pay the balance in full doesn’t mean your percentage is 0.  Credit scores can’t tell what your intentions are and as long as the balance is showing up on your credit report then you will have a utilization percentage greater than 0.

NOTE: Sometimes credit limits don’t show up on credit reports.  This is what I was referring to earlier about it not being accurate 100% of the time.  If your report has missing credit limits on open credit card accounts then you’re not out of the woods.  Look for the field called “High Balance” and use that figure in lieu of the missing credit limit.  The high balance is the historical highest balance on that account.

Aggregate Utilization – Calculate this next

The method for calculating aggregate utilization is exactly the same as it was for 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 do this right.  Just because you have a credit card that doesn’t have a balance doesn’t mean it won’t count here.  You’ll still include the credit limit, which will help your percentage.  This is the number one reason you don’t want to close credit card accounts even if you don’t use (or want) the card any longer.  The unused limit helps your utilization percentage.

What’s a Good Percentage?

According to FICO, the consumers who have the highest scores in the country (760 and above) have an aggregate utilization of 7%.  That’s about as clean of an answer you’re ever going to get to a FICO score question.  Of course that doesn’t prevent people from giving answers that are all over the place.  I’ve seen 30%, I’ve seen 50% and I’ve even seen 70%. This can vary based on other scoring models; if your check your free credit score using the VantageScore model, aggregate utilization may be different.

The way the scores are designed rewards consumers for having a lower rather than higher utilization.  So, generally, the lower the number the more points you’re going to earn in your score.  30% is better than 50%, but not as good as 7%.  And I’m not sure where in the world someone got 70%, that’s just terrible.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit.