Your credit card utilization plays an important factor in your credit scores. It also happens to be one of the most complicated and often misunderstood equations for consumers to understand. The following will explain what credit card utilization is, how it impacts your credit score, and then give you an example of exactly how you can run the calculation on your own credit card accounts.
Credit Card Utilization Defined
First, what exactly is credit card utilization? In a nutshell, credit card utilization is the percentage of your total balance in relation to your credit limit on each of your credit cards, expressed as a percentage. And when it comes to calculating your credit scores, it’s 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.
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 each of the cards have revolving terms, which means you don’t have to pay the balance in full each month, the card 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. You’ll also need to make a list of all the balances you’re currently carrying on each of your credit cards, and write that down too.
There are several ways to find this information, the first would be to use your credit reports and look at what your credit card issuers are reporting. 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. The most accurate way to do this is to get the information from your credit reports because that's where credit scores get the information.
Once you’ve made a list of all of the credit limits and balances for each card, you’re ready to run your calculations. Add up all of your credit card limits in one column, then add up all of your credit card balances in another. Divide your total balances by your total credit limits and you’ll have your total revolving utilization.
Here’s an example:
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:
Total Balances ÷ Total Credit Limit = Total Revolving Utilization x 100 = %
$5,000 ÷ $10,000 = .5 x 100 = 50%
Based on this example, your total revolving utilization would be 50%, which is actually quite high. When it comes to revolving utilization, the goal is to get the percentage down as low as possible. The lower the percentage, the better for your credit scores.
The Best Credit Utilization Percentage?
This is a very good question, and I’ve seen my fair share of experts suggesting advice ranging from 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 that 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’s 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.