How Does the Credit Utilization Percentage Impact My Credit Score?

John Ganotis

John Ganotis | Blog

Aug 15, 2018 | Updated Sep 12, 2019

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Although credit utilization is one of the most important factors in the calculation of credit scores, many people don’t understand what it actually means.

Below, we dive into the nitty-gritty of credit utilization. We’ll answer all your questions, including:

  • What is credit utilization?
  • How do you calculate credit utilization?
  • How does credit utilization affect credit scores?
  • How can you improve your credit utilization?

Here’s the big takeaway: The lower your credit utilization, the better it is for your credit scores.

But there’s more to credit utilization than that, and we’ve got some tips to help you keep your scores in top shape. In other words? Keep reading!

What Is Credit Utilization (Revolving Utilization)?

Credit utilization refers to the ratio between your total credit card balance and your total credit limit.

Say you have two credit cards, each with a limit of $5,000, making your total credit limit $10,000. If you have a balance of $2,500 on one card and a $0 balance on the other, your total balance is $2,500 and your credit utilization ratio is 25%. Or, put another way, you’re using 25% of your total available credit.

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

How to Calculate Your Credit Utilization

To determine your credit utilization, log in to each of your credit card accounts and gather the following information:

  • Credit limit
  • Current balance

Both of these numbers should be clearly marked on your credit card statement. Add up the credit limits across all your cards, then separately add up the balances, too.

Next, divide your total balance by your total credit limit, and multiply by 100 to get a percentage.

Total Balance ÷ Total Credit Limit = Credit Utilization x 100 = %

Here’s an example to drive it home:

Balance Credit Limit
Card A $800 $1,000
Card B $2,000 $5,000
Card C $3,000 $10,000
Total $5,800 $16,000
$5,800 ÷ $16,000 = .36 x 100 = 36%

In this situation, your credit card utilization would be 36%, which isn’t terrible but also isn’t great. When it comes to credit utilization, your goal is to get the percentage as low as possible.

The lower the percentage, the better for your credit scores.

Your per-card utilization rate matters, too. Consider Card A: Its individual utilization rate is 80%! That’s not something lenders want to see, even if your overall utilization is low.

You can also use credit monitoring services to easily check your credit utilization, like Chase’s Credit Journey or Capital One’s CreditWise tool.

How Does Credit Utilization Affect Credit Scores?

When it comes to calculating your credit scores, credit utilization is one of the most important factors.

Take a look at what goes into your FICO scores, which come from the most popular credit scoring agency.

What’s In Your Credit Score?

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

As you can see, “amounts owed” accounts for 30% of your score, and credit utilization is one of the most important factors in that category.

Why? If you’re maxing out your credit cards, lenders might assume you can’t afford your lifestyle — and will therefore view you as a higher credit risk. But if you have a good credit utilization ratio, they’ll assume your spending is under control, and that you’ll be a good borrower.

If you’re solid in other areas of your credit reports, with a record of on-time payments and no collection accounts, then your credit utilization ratio will have less of an impact. But if you have a thin credit file, with only one card open for, say, a year, your credit utilization ratio could significantly affect your credit scores.

The bottom line: If you want to achieve high credit scores, strive for as low a credit utilization percentage as possible.

The Exception to “Lower is Better”

But don’t eschew your cards completely. Most credit scoring models view 1% utilization as better than 0%.

If you pay off your full balance early, before a statement is generated, your next statement will show a $0 balance. This is the number that will show up on your credit reports. If only $0 balances are reported to credit bureaus, lenders and credit scores may consider the account inactive. You may not build as strong a credit profile as you could, even though you’re paying your bills ahead of time. Lenders like to see that you’re using credit — but not relying on it too much.

We recommend paying your full statement balance between the time you get your statement and the due date. If you spend a lot one month and are concerned about high utilization, you could make a partial payment early, before the statement is generated.

What’s the Best Credit Utilization Percentage?

Though you may have seen experts say you should keep your credit utilization “under 30%,” there’s no magic number. Lower is generally better, as long as it’s not 0%.

Consider this: Consumers with FICO scores of 780 and higher have an average utilization of 7%.

Even if that seems out of reach, work on lowering your credit utilization ratio — every bit helps.

Do I Need to Maintain Low Utilization Every Billing Cycle?

Generally, the answer is no — the current numbers on your credit reports are what matter most. Some people think it’s important to maintain low utilization every month to have the highest credit scores, but with many major credit scoring models in use today, utilization is based on the current balances and limits on the credit reports when the score is calculated. The historical balances or credit limits and utilization over time are not considered by most models.

As long as you pay your full statement balance each month you can use your card for purchases up to the credit limit, avoid interest, stay out of credit card debt, and build good credit scores.

Then, if you’re planning to apply for credit and want to try to maximize your scores optimize your scores, you could pay everything down or change your card use habits to lower utilization and boost credit scores in the billing cycle before you apply for new credit.

There’s nothing wrong with always maintaining low utilization, though. In the long term, it can be easy to maintain low utilization with regular credit limit increases. With high credit limits, you can maintain low utilization all the time, even if you spend thousands of dollars per month on cards every month and pay it off in full.

In some credit scoring models, historical utilization does matter, to some degree. Newer credit scoring models, like VantageScore 4.0, include what’s called trended data. For example, a trend of increasing balances relative to limits could lead to lower scores by showing that someone is building up credit card debt over time. On the other hand, someone who’s utilization is decreasing over time can indicate someone who’s getting back on his or her feet financially by paying off debt.

Do Business Cards Count Toward Credit Utilization?

If you apply for a business credit card — and haven’t already established credit as a business — the issuer will likely check your personal credit history and ask for a personal guarantee.

Your business credit card activities, however, won’t usually go on your personal credit reports, unless you miss a payment. That also means credit limits and balances on business credit cards usually won’t impact your personal credit utilization and credit scores. There are some exceptions, though, like Capital One’s business cards. See this table to learn about how credit card companies report business credit cards on personal credit reports.

So, you can use balance transfers to move credit card debt over to business cards. This will reduce your personal credit utilization, and improve your credit scores.

Is It Better to Split a Balance Among Several Cards?

In an ideal world, you should aim to pay your credit card balances off in full every month (preferably before the statement closing date on your accounts in most cases). Yet even if you can’t afford to pay off your credit card balances in full, you can still be strategic about how you carry your outstanding debt.

Spreading your credit card balances out among several accounts typically isn’t a good move where your credit scores are concerned. Instead, it’s probably better to consolidate your revolving debt onto a single account. Yes, you may increase the credit utilization ratio on that specific credit card, but the overall impact could be slightly better for your credit scores.

Here’s why.

  • Credit scoring models like FICO and VantageScore consider revolving utilization in two ways — overall utilization and individual utilization.
  • Your overall credit utilization (also called aggregate utilization) isn’t going to change whether you carry a large balance on one account or spread it out over several cards.
  • You can lower the individual utilization ratios on some accounts by combining all your credit card debt together.
  • Credit scoring models also consider the number of accounts with balances on your credit reports.
  • Having fewer accounts with outstanding balances can be good for your credit scores.
Wondering how to consolidate all your debt onto one credit card? Learn all about how credit card balance transfers work.

8 Ways to Improve Your Credit Utilization Ratio 

Aside from the obvious — paying off as much credit card debt as you can — here are a few other ways to improve your credit utilization ratio:

1. Avoid Closing Credit Cards

While it might seem prudent to close a credit card you’re not using, it’ll lower your available credit — and therefore increase your utilization. Unless a card has a high annual fee, we recommend keeping it open. (Cut it up if you don’t want to use it.)

2. Request a Credit Limit Increase

Improving your credit utilization could be as simple as making a phone call. Credit card issuers will often raise your credit limit if you ask, therefore increasing your available credit and lowering your utilization.

3. Make Multiple Payments Each Month

Issuers report your balances to the credit bureaus once a month. If you normally pay your bill in full, but your issuer submits its data before the end of the billing cycle, it could look like you always have a large balance on your card. To avoid this, make multiple payments each cycle. Or call your issuer to find out when it does its reporting — and make sure you’re paying your bill before that time of the month.

4. Use More Than One Card

As noted above, scoring models often look at your per-card utilization, too. So, rather than charging everything to one card, consider spreading out your expenses across multiple cards. (This is only worth it, however, if you can keep track of each bill and pay them all on time.)

5. Set Balance Alerts

To prevent overspending, many issuers let you create notifications that alert you when you’ve approached a certain balance on your card.

6. Take Out a Personal Loan

Because personal loans are installment — rather than revolving — loans, they don’t impact your revolving utilization. If you want to improve your credit utilization, you could pay off credit card debt with a personal loan. Just be cautious with this route: You don’t want to get a personal loan and then end up maxing out your credit card again. Balances on installment loans can also affect your credit scores, but not as much as on credit cards.

7. Transfer Balances to Business Cards

Since business credit cards don’t normally show up on your personal credit reports, their balances won’t affect your credit utilization. If you transfer a balance from a personal card to a business card, that debt will no longer increase your utilization ratio. But watch out for balance transfer fees. We recommend using a card with a 0% intro rate, if you can find one.

8. Open a New Credit Card

While this will increase the amount of credit available, it’ll also result in a hard inquiry on your credit reports, which could result in lower scores for a short period of time. Like taking out a personal loan, this strategy will only work if you can control your spending on the new card.

Above all, pay your bills on time, every time. By doing that, and lowering your credit utilization, your credit scores are bound to improve.

Can I Have Negative Credit Utilization?

It’s smart to research ways you can use your credit cards to your advantage; this includes finding ways your accounts can help you maximize credit scores. Credit cards can definitely be powerful credit-building tools, when you manage them properly. However, some credit card strategies miss the mark.

The idea that you can boost your credit scores by overpaying your credit card account is an example of well-intentioned advice gone bad. Overpaying a credit card account won’t help your credit scores. It’s also not a good way to manage your money.

When you overpay your credit card, your account will reflect a negative balance. If you check your statement or account activity online, that credit might look something like this:

Account Balance: -$250.00

Overpaying isn’t the only way to receive a credit or negative balance on your credit card account. Other potential reasons a negative balance might occur include the following:

  • A statement credit is posted to your account, after you make a payment. (This might occur as part of a welcome bonus or a travel credit, such as the one offered by the Capital One® Quicksilver® Cash Rewards Credit Card (Review).)
  • You receive a refund for a purchase made on your account, after you make a payment. (Refunds often come from merchants when you return an unwanted product.)
  • Your card issuer refunds your account as a courtesy or due to an error or fraudulent charge. (A card issuer refund could occur when you dispute a fraudulent charge or, as a courtesy, when you ask for an account-related fee to be waived.)

Regardless of the cause, a credit or negative balance on your credit card account will not help your credit scores.

Low credit utilization on a credit card is certainly good for your credit scores. FICO reveals that consumers with credit scores of 800+ use 5% or less of their available credit card limits, on average. However, you won’t receive any extra credit score bonus points from a -1% utilization rate than you would from 0% utilization.

In fact, -1% utilization will never show up on your credit reports. Credit card issuers don’t have the ability to report negative utilization to the credit bureaus.

Your statement might show that your balance is -$250. Your credit reports, on the other hand, would show a $0 balance.

Since your credit scores are based on the information found on your credit reports themselves, there’s no credit score benefit to overpaying your credit card balance. When your credit card has a negative balance, you’ll also miss out on any interest that money could be earning in the bank.

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