Credit utilization ratio is an important factor in your credit score and measures how much of your available credit you’re using
Credit utilization is a measure of how much of your available credit you’re using. And it applies to revolving credit accounts like credit cards, personal lines of credit and home equity lines of credit. It’s sometimes called a credit utilization ratio, but it’s often expressed as a percentage.
But why does your credit utilization ratio matter? It’s an important factor in calculating your credit score. And the lower your credit utilization, the better your credit score might be.
How to Calculate Your Credit Utilization
Two numbers can help you calculate your credit utilization. One of them is the amount you owe across all of your revolving credit accounts. The other is your total credit limit.
To calculate your credit utilization, follow these four steps:
- Add up all of your revolving credit balances.
- Add up all of your credit limits.
- Divide your total revolving credit balance (from Step 1) by your total credit limit (from Step 2).
- Multiply that number (from Step 3) by 100 to see your credit utilization as a percentage.
For example, say your only line of credit is a credit card with a $2,000 limit. If your balance is $1,000, your credit utilization ratio, expressed as a percentage, would be 50%.
What Is a Good Credit Utilization Ratio?
According to the Consumer Financial Protection Bureau, experts recommend keeping your credit utilization below 30% of your available credit. So if your only line of credit is a credit card with a $2,000 limit, that would mean keeping your balance below $600.
A low credit utilization ratio could be a sign that you’re using your credit responsibly and not overspending. And that could help you keep a good credit score or even improve your score.
But the opposite is also true: A high credit utilization ratio could have a negative effect on your credit score. And credit utilization isn’t the only factor impacting your score. Other factors, like late or missed payments, can negatively impact your score too—even if your credit utilization is low.