How Does The Credit Card Utilization Percentage Impact My Credit Score?

John Ulzheimer

John Ulzheimer | Blog

Oct 30, 2014 | Updated Aug 14, 2018

Credit card utilization is one of the most important factors in the calculation of your credit score. It also happens to be one of the most complicated and often misunderstood equations for consumers to understand.

Credit Card Utilization Defined

First, what exactly is credit card utilization? In a nutshell, credit card utilization is the percentage of your total credit card balance that is currently put to use, or taken up by debt. It is simply the amount of debt you have incurred on all of your credit cards, compared to the total credit limit.

Your total credit limit is calculated by adding up the credit limits on all of your credit cards. So, the combined balance on all of your credit cards is being compared to the combined credit limit on all of your credit cards, giving you the total credit card utilization percentage. This is also known as the debt-to-limit ratio. Usually, having a high credit limit decreases your debt-to-limit ratio.

Did you know? Having multiple credit cards can improve your utilization percentage.

Calculating Credit Card Utilization: The Formula

Now comes the fun part, calculating your total revolving utilization on your credit card accounts. The easiest way to do this is to grab every single credit card you have, including retail and gas cards, and put them in a pile. As long as the card has revolving interest terms, which means you can carry a balance from month-to-month, it should to be in the stack and part of your calculation.

  • Each of these credit cards has a credit limit. It’s the maximum amount you’re allowed to charge on the card, and you need to find out what that limit is and write it down.
  • Then, make a list of all the balances you’re currently carrying on each of your credit cards.

There are several ways to find this information. First, try checking your credit reports and looking at what your credit card issuers are reporting. This is the most accurate way because that’s where credit scoring agencies get the information. Depending on your card issuer, you may be able to access your statement information from the issuer’s website.

You can also use your most recent credit card statements, or if that’s not available – pick up the phone and call the 800 number on the back of the card. Once you’ve made a list of all of the credit limits and balances for each card, you’re ready to run your calculations:

  1. Add up all of your credit card limits in one column.
  2. Add up all of your credit card balances in another.
  3. Divide your total balances by your total credit limits, and you’ll have your total revolving utilization.

To put it simply:

Total Balances ÷ Total Credit Limit = Total Revolving Utilization x 100 = %

An Example Credit Card Utilization Calculation

Let’s assume you have two credit cards, each with a $5,000 credit limit, and you’re carrying a balance of $2,500 on each card.

Your total credit limit would be equal to $10,000, and your total balances combined would equal $5,000.

The calculation would look like this:

$5,000 ÷ $10,000 =  .5 x 100 = 50%

Your credit card utilization, or debt-to-limit ratio, is 50%, which is quite high. When it comes to revolving utilization, the goal is to get the percentage down as low as possible, which means paying off your credit card balances as you go, and keeping an eye on your total utilization. The lower the percentage, the better for your credit scores.

How Does Credit Card Utilization Impact My Credit Scores?

When it comes to calculating your credit scores, credit card utilization is one of the key factors in the debt calculation category. In the FICO credit risk scoring model, the debt category accounts for 30% of your score, and the credit card utilization percentage is definitely one of the most important factors in that category. The bottom line is this: if you want to earn an impressive credit score, you need a low credit card utilization percentage. Also, keep in mind 1% utilization is generally seen as better than 0% by credit scoring models.

What’s In Your Credit Score?

This chart shows the criteria used to create FICO scores and their relative importance in your credit score.

What Is The Best Credit Card Utilization Percentage?

This is a very good question, and I’ve seen my fair share of experts suggesting that cardholders should aim for 30% to 50%, which always makes me shake my head. How they come up with these random numbers baffles me because nothing miraculous happens at 30%, or 25%, or even 50%. The fact is, 30% is better than 50%, and 25% is better than 30%, and you want this number to be as low as possible.

Consider this: consumers with FICO scores of 780 and higher have an average utilization percentage of 7%.  If you factor in their high scores, I’d say that this is a pretty good percentage to aim for; after all, these are FICO’s credit elite. Keep your revolving utilization as low as possible, and if you can keep it at 7% or less, you’ll have no problem acing this FICO score category.

Do Business Credit Cards Count Toward Utilization?

If a business owner applies for a business credit card and hasn’t already established credit as a business, a credit card issuer will likely check the owner’s personal credit history and ask for a personal guarantee.

If the bill isn’t paid on time, for example, that delinquency will likely be reported on the business owner’s personal credit reports as well as to business credit bureaus. However, regular good activity, like on-time payments every month, will not be reported on the owner’s personal credit reports. This also means the credit limits and balances on business credit cards that report this way will not impact the business owner’s personal credit utilization and credit scores.

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