Credit · January 20, 2022

4 Tips to Improve Your Credit Utilization Ratio

Using credit is an important part of building your financial history and keeping your accounts in good standing—but how much available credit should you have?

While there's not an exact dollar amount, most financial experts agree that limiting how much credit you use is typically in your best interest. With that in mind, you can look to your credit utilization ratio for guidance on how much to use.


How do you calculate credit utilization?

Your credit utilization ratio is the percentage of available credit you're using versus what's available at at any given time. It's calculated by dividing your credit card balance by the amount of your credit line or card limit.

If you have a $600 balance on a credit card with a $1,000 limit, for example, your utilization ratio for that particular card is 60%. That means your available credit is $400, or 40%.

If you have more than one credit card, you can calculate your utilization ratio by adding up your total credit card balances, divided by your total available credit lines.

Why does credit utilization matter?

Your credit utilization makes up about 30% of your credit score, according to Experian. This number can affect your ability to get a good rate—or even get approved at all—on a car or home loan. It can even impact whether you get hired for certain jobs.

Lenders consider how much credit you use at any given time as one measure of how financially reliant you are on credit. So, even if you have a "charge everything" attitude because you want to earn as many credit card rewards as possible, having a high credit card balance—even one that you pay off in full each month—can make it appear to lenders that you don't have enough cash to fund your lifestyle.

As a result, your utilization ratio may impact the rate you're offered if you're approved to borrow—and in some cases, whether you're approved to borrow at all.

What is a good credit utilization ratio?

Experts typically advise keeping your credit utilization ratio to no more than 30%. Maintaining a lower ratio helps you avoid taking on more debt than you can afford to pay off in full. Generally the lower you keep it the better, and the higher your credit score will be.

That doesn't mean the only way to manage credit utilization is to avoid using credit, but it does help to strategize how you manage your credit card use.

Ways to keep credit utilization low

There's more you can do to keep your credit utilization ratio low. Try these tips to reap the rewards and benefits your credit cards can offer, while still managing how much of your credit is in use.

1 Pay down any outstanding credit card debt

The easiest way to reduce your credit utilization ratio is to use less credit. Focus on paying down any existing credit card balance, and don't charge items that you can't afford to pay off at the end of the month. That may mean putting off bigger purchases like a vacation until you've got the cash to fully pay for it.

While delaying gratification can be tough in the short term, building the habit will pay off in the long run.

2 Don't just pay your credit card balances by the monthly due date

Many credit cards report information about credit card balances to credit reporting bureaus 30 days after the billing cycle. Even if you pay your credit card balances in full each month by your payment due date to avoid paying interest, they could still show on your credit report and impact your credit score.

To increase the likelihood that your low balance will make its way to your credit report each month, either pay your balance in full by the statement closing date, which is shown on your credit card statement, or pay your credit card bill a few times a month instead of just once.

3 Ask for a higher credit limit

If you've had a credit card for some time and proven that you can keep your balances low, requesting a credit limit increase could benefit your credit utilization.

Consider calling your card issuer to ask whether they'll raise your credit limit. Most people who ask for a limit increase get one, but you'll have better luck if you have a history of on-time payments.

While the creditor's inquiry into your credit to determine whether you qualify for a higher limit could lower your credit score by a few points, the impact should only be temporary.

Keep in mind that you don't have to use the higher limit just because it's there. In fact, having access to a higher limit and not actually using it will have a positive impact on your credit score. For example, if you got a $10,000 credit limit raised to $15,000 but maintained a $2,000 balance, your credit utilization ratio would fall from 20% to 13%.

4 Don't close old credit cards

While it may seem like closing unused credit cards is good for your credit score, the opposite is actually true. The more credit cards you have active and open, the more likely you'll have lines of available credit that could help your utilization ratio.

For example, a person who has just one credit card exceeds the recommended ratio by carrying a $600 balance on a $1,000 credit card. But if that same person also owned two other credit cards with a $0 balance and $500 credit limit apiece, they'd have the recommended utilization ratio of 30% ($600 total credit card balance divided by the total available credit limit of $2,000 for all cards).

For this reason, it's good to think through the potential impact that closing a credit card might have on your utilization ratio. In some cases, it may still make sense to cancel the card. A credit card that carries a high annual fee may not be worth keeping if you don't intend to use it.

Enjoy the benefits of a higher credit score

Maintaining a low credit utilization ratio takes some work, but the payoff is a higher credit score, which can make the rest of your financial life easier. With a higher score, you may get a lower interest rate on loans, pay less for insurance and even qualify for credit cards with more valuable rewards programs.

Practical strategies like these can help you keep your credit availability high and your utilization low, while still allowing you to use credit cards and other lines of credit in a way that reflects your long-term financial goals.

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