What is a Credit Utilization Rate? How Does it Affect My Credit Score?

• A person’s credit utilization ratio will go up and down with payments and purchases.
• Credit utilization is one factor in how credit bureaus calculate a credit score for a borrower.
• Pay attention to their credit utilization ratio as a high ratio can reflect poorly on a person’s credit score

Tips to Manage Your Credit Utilization Percentage

• Spread Out Your Charges Over Different Cards: This way you’ll have lower balances on several cards instead of a balance that uses more than 30% of your limit on one card.
• Time Your Payments Right: Find out when your card issuer reports information to the credit bureaus and pay attention to the date you make your card payments each month. If your balance is high when your issuer sends your account information, then the credit utilization of your credit score will also be high. Make sure your balance is low by your account statement closing date (the date your billing cycle ends). Check a recent copy of your billing statement to gauge your next account statement closing date.
• Increase your available credit: If your income has increased, you’ve maintained an amazing credit history, or you have little debt, it doesn’t hurt to ask for a credit limit increase. Just remember that this can sometimes result in a hard inquiry on your credit. If you lack excellent credit, you may want to consider opening a secured credit card and adding to its security deposit over time.
• Pay Your Credit Cards Twice Each Month: This is probably the most low-maintenance way to keep your utilization low. This way, even if you’re using the cards throughout the month, a mid-month payment can pay the card back down to a level that stays below the 30% threshold.

Impact on Credit Scores

As mentioned above, your credit utilization rate is an important indicator of lending risk. In the eyes of most lenders, a person who constantly charges all the money they can is more likely to have difficulty repaying that money. Conversely, someone who charges smaller amounts may be more likely to be able to pay off their balance in full each month, and thus represents a lower risk to the lender.

With that said, there’s a strong correlation between a consumer’s credit card utilization rate and their credit scores. Though individual cases may vary, those who keep their utilization percentage low generally have higher scores than those who habitually max out their credit cards.

If you don’t want your credit utilization to negatively impact your credit scores, it’s important to consider your spending habits. Factors such as your credit history and the number of cards in your wallet matter, too.

What is a Good Credit Utilization Rate?

In a FICO^® Score, it is a good idea to keep your total credit utilization rate below 30%. Generally, a low credit utilization ratio is considered an indicator that you’re doing a good job of managing your credit responsibilities because you’re far from overspending. A higher rate, however, could be a flag to potential lenders or creditors that you’re having trouble managing your finances.

Every month when you pay your credit card bill, you’re affecting your credit utilization rate. It’s important to understand that your credit utilization rate — and by default your credit scores — can be affected by the timing of when a credit card company updates your balance information with the credit reporting agencies. Typically, credit card companies update this information every 30 days at the end of your billing cycle.