What Is Credit Utilization – And Why Does It Matter?

Credit utilization is one of the biggest factors in determining your credit score. It's a ratio that compares how much credit you have available across all types of credit vs. how much of it you're currently using.

As you can guess, this number fluctuates constantly based on your spending and repayment habits. The good news is, by improving your credit utilization – ideally keeping it under 30% – you'll quickly see your credit score jump up. Here's everything you need to know about how to find your credit utilization and ways you can improve it.

What is credit utilization?

Credit utilization is simply how much credit you have and how much of it you're using. It's the credit balance you're using in relation to your total available credit, shown as a percentage.

Lenders of all kinds use credit utilization to determine whether or not to extend credit to you. It's also a big factor in calculating your credit score. Whether you're shopping for a new credit card, looking for a mortgage, or buying a car, your credit utilization is an important factor.

How to calculate your credit utilization ratio

All you have to do to calculate your credit utilization ratio is add up everything you owe and divide it by the total amount of credit you have available. Multiply the result by 100 to get the percentage of credit used.

(Total credit balance / Total credit available) * 100 = Credit utilization %

So, for example, if you have a credit card with a balance of $1,000 and a limit of $3,000, here's what your formula would look like:

($1,000 / $3,000) * 100 = 33%

Include only revolving credit in your calculation. Revolving credit is credit that you use repeatedly while making regular payments. Credit cards and lines of credit are classic examples of revolving credit.

You don't need to include installment loans. Think of installment loans as those payments that are fixed – things like mortgages, car loans, student loans, or any other personal loans.

Pro tip: Installment loans do show up on your credit report and play a part in your overall credit score. But they're not taken into consideration when it comes to credit utilization.

How does credit utilization affect your credit score?

According to Equifax, one of the major credit monitoring bureaus in Canada, credit utilization accounts for 30% of your credit score – one of the biggest factors. This means that improving your credit utilization can have a dramatic impact on your overall credit score.

Here are all of the factors that Equifax and TransUnion use to come up with your credit score:

• Payment history: 35%
• Credit utilization: 30%
• Credit history: 15%
• Public records: 10%
• Inquiries: 10%

So, if you're hoping to boost your credit score, consistently making payments on time and improving your credit utilization ratio will help you see the most dramatic results.

How to improve your credit utilization

Having a credit utilization ratio over 30% can hurt your credit score pretty badly. Fortunately, there are things you can do to lower that ratio – and, in turn, improve your credit score. We'll start with the easiest strategy, before moving on to tips that may take more time.

Increase your credit limits

Our first suggestion should only take a few minutes. Log in to your credit card account or call customer service and ask to increase your credit limits.

Typically, your credit card company will ask for your updated income amount. They might also ask if you've changed careers.

If you've made consistent payments and usually pay off your balances, most credit card companies will accommodate your request. You're also likely to get a credit limit increase if it's been a while since you applied for the card and you haven't updated your income in some time (assuming it's gone up).

Why it helps: Raising your credit limit improves your credit utilization even if you're borrowing the same amount.

Let's take our previous example of owing $1,000 on a $3,000-limit credit card. Now, assume your credit limit was raised to $4,000 (and you still owe $1,000). Your credit utilization ratio would drop from 33% to 25%.

As long as you don't increase your spending along with the higher credit limit, your credit utilization will improve.

Get a new credit card

If you've been thinking about getting another credit card, consider that it could improve your utilization ratio. Plus, you can enjoy welcome bonuses, earn rewards for spending, and open up another line of credit.

We should caution you that your credit score will take a temporary hit, since applying for a credit card results in a hard inquiry. Getting a new card will also lower the average age of your credit accounts, so be aware of these impacts before applying for credit.

Why it helps: This is another way to increase the amount of available credit (just like increasing the credit limits on your existing cards). So, as long as you keep your spending low and make regular payments, you should see your credit utilization improve.

Pay off your balances

This one is dependent on your financial situation. But if you carry a balance on any of your revolving credit, paying it off will reduce the other side of the credit utilization equation – your credit balances.

If you currently have credit card debt with high interest and need help paying it off, we suggest looking into a balance transfer credit card. These cards offer introductory balance transfer offers, where you'll get a very reduced rate for a short period of time.

As an example, one of the best offers is with the MBNA True Line^® Mastercard^®. It has a balance transfer offer of 0% for 12 months, with a transfer fee of 3% of the amount transferred.

Why it helps: Remember that reducing the amount of credit you're using is another way to boost your utilization ratio. For example, if you get your credit card balance down to $500 (from $1,000) and your credit limit stays the same at $3,000, you'll see your credit utilization go from 33% to around 17% – 16.7% to be exact.

$500 ÷ $3,000 = 0.167 = 16.7%

Pay off your credit cards more frequently

Do you find that even though you intend to pay off your credit card at the end of every month, your balance creeps up and you can't?

Try this strategy: Instead of paying your card once or twice a month, make more frequent payments in order to pay off the balance. For instance, if you get paid once a week, make a point of paying off your credit card whenever you get paid.

Not only will the balance stay in check, but you'll also save on the interest your credit card provider would charge if you carry a balance.

Why it helps: By making payments, you're lowering the credit balance that the credit card company would be reporting. It means you're lowering your utilization ratio – even though you're still using your credit card for the same amount of purchases.

How to check your credit score and report

Before you can lower your credit utilization ratio, you've got to know what it currently is. Fortunately, you can access your credit score for free through your bank, credit monitoring bureaus, and third parties.

Take time to find the product that includes all the credit services you're looking for. For instance, you might want to see which credit bureau a service pulls from, or check to see how often your data is updated and reported.

FAQ

What is a credit utilization ratio?

Credit utilization ratio is the ratio of how much credit you're actively using against how much credit you have available. It's shown as a percentage, with higher rates indicating financial difficulty and lower rates showing good financial management.

What is a good credit utilization rate?

The lower your credit utilization rate, the better. If you're trying to build your credit score for the purposes of taking out a loan, aim for a credit utilization ratio of 30% or less. This shows lenders that you're not financially stressed.

Is 100% utilization good or bad?

A credit utilization of 100% means you've used all of the available credit associated with your credit card. So, you're basically maxed out, which is never a good thing. Lenders see 100% utilization as a major red flag.

What is the biggest killer of credit scores?

Your payment history is the biggest factor that goes into your credit score, accounting for 35% of it. Missing payments, especially across multiple accounts, is one of the fastest ways to damage your credit score.