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To charge or not to charge: Credit utilization is the question

When it comes to credit utilization, the “magic” number is 30. But what does that mean, exactly? We take a look at credit utilization, why it matters, and how to improve it.

Gregory Andersen

Managing Editor at Tally

August 30, 2018

Most people would agree maxing out a credit card is a bad idea.

But fewer people are clear on exactly how much of their credit they should be using. The percentage of your credit limits that you use is referred to as credit utilization or revolving utilization.

Your credit utilization is an important factor in determining your credit score. And if you're using too much of your credit, your credit score can suffer.

What is credit utilization?

Your credit utilization is the amount of credit you’re using at any given time compared to how much credit you have available to use. 

In the case of credit cards, it’s often referred to as revolving utilization. What is revolving utilization, exactly? It’s the amount of revolving credit you’re currently using divided by the total amount available from your revolving line of credit.

Here’s how it works: You have a credit card with a $5,000 revolving line of credit, and you’ve used $2,000 to date. Your credit utilization is 40% because you’re utilizing 40% ($2,000/$5,000) of the credit that’s available to you.

Revolving utilization can also impact other types of revolving credit, such as a personal line of credit. 

Credit utilization does NOT include installment loans, like mortgages or auto loans. It’s only used with revolving credit. 

Credit scoring models account for two different types of revolving utilization:

Per-card credit utilization: This refers to the percentage of a credit limit that is in use on a given card. For instance, if you have a credit card with a $10,000 limit and a $2,000 balance, the utilization rate on this card is 20%.

Total credit utilization: This refers to the percentage of total available credit that is in use across all your card accounts. For example, say you have three credit cards with combined credit limits of $10,000. The cards have balances of $3,000, $1,500, and $500. Total, your combined balance is $5,000, so your total credit utilization is 50% ($5,000/$10,000). 

Both of these utilization rates contribute to your credit score. Generally speaking, lower utilization rates lead to higher credit scores. 

Why does credit utilization matter?

Credit score providers consider your credit utilization — and you should, too.

FICO®  and VantageScore, the two primary credit score providers, consider your credit utilization when calculating your credit score. Each has a varied model and calculates your credit score in a different way: FICO says your credit utilization can affect up to 30% of your credit score, while VantageScore says it is a “highly influential” factor.

If you have a low credit utilization rate, credit score providers see it as a strong indicator of your financial responsibility. It means you’re managing your existing credit well and that you’re less of a risk when it comes to future credit and loans.

On the other hand, if you have a very high ratio, that could be a warning sign to creditors that you are using too much credit. If you’ve nearly maxed out your available credit limit, that signals to lenders that you may not be able to repay your debts. 

What’s the best credit utilization ratio? 

Ideally, your credit utilization rate should be 30% or less. So if you have $10,000 in total revolving credit, you should aim to keep your balances under $3,000. 

The average credit utilization rate in the United States is currently around 25%.

Just as a low rate can indicate your ability to manage your existing credit, a high rate can be a red flag for both lenders and creditors about your ability to repay what you borrow.

If you have a low credit utilization rate, credit score providers see it as a strong indicator of your financial responsibility.

This 30 percent threshold is not a cliff. Think of it more like a sliding scale — the closer you are to 30 percent credit utilization, the better your credit score will be.

Your overall credit utilization is the average rate spread across all credit accounts. So, even if your rate is below 30% on three of your credit cards, a fourth card with a higher rate can have a significant impact.

And remember, both total revolving utilization and per-card utilization contribute to your score. You should keep an eye on each individual account, as well as the total balances across all your accounts.  

Ways to improve credit utilization ratio

The easiest way to improve your credit utilization is to simply pay down existing debts, thereby reducing your balances. Of course, this isn’t always possible, so it’s worthwhile to explore alternatives.

Want a boost towards reducing credit card balances? Check out Tally†, the app that helps qualifying applicants consolidate credit card balances into a lower interest line of credit. Learn how Tally works here

Request a credit limit increase

As an alternative, you can request a credit limit increase. Requesting a credit limit increase can boost your purchasing power and simultaneously lower your credit utilization — and that will likely help your credit score.

Requesting a credit limit increase is more than just asking nicely: You need to show why it makes sense for your credit issuer. Here are a few good reasons:

  • You just got a raise and are in a good position to pay off your debt.

  • Your credit score is on the rise, which shows you’re on the right track.

  • You’ve been consistently making all of your credit payments on time.

On the other hand, it’ll be a harder sell to request a credit limit increase if your credit score is trending downward or if you have recently made late payments.

Importantly: A credit limit increase request can trigger a hard inquiry on your credit report, which can have a temporary negative effect on your credit. Check with your credit issuer and ask if the hard check is avoidable.

Make payments early

Another way to reduce your credit utilization is through micropayments.

Micropayments are smaller, frequent payments that can keep your balance in check, instead of one lump sum payment every month. Put simply, it’s paying earlier and more often.

Your credit score is based on your credit report, and your credit report is based on the information your credit card issuer reports to the credit bureaus every month.By increasing your payment frequency, you decrease the likelihood that you’re carrying a big balance when your credit card issuer makes its monthly report to the credit bureaus.

Open a new credit account

In some cases, it can make sense to open a new credit card or other credit account. The new credit limit will be added to your total credit limit, which is used to calculate credit utilization.

Of course, opening a new card also comes with downsides. It will result in a hard credit pull, which can temporarily ding your credit. It’s best to only open a new account if you have a legitimate need to do so. 

Keep old cards open

It’s wise to keep all your credit card accounts open, even if you don’t actively use them. The credit limits on old cards will still influence your total revolving utilization rate, but if you close them, that benefit goes away. 

If you have old, inactive cards, it’s a good idea to use them at least once per year to keep them open. Some card issuers will automatically close credit card accounts after a certain period of inactivity. One way to do this is to pay a recurring charge, such as a streaming subscription, with the card. 

Bottom line

When it comes to credit utilization, the “magic” number is 30. If you want your credit score to improve, aim to keep your credit utilization at or below 30%

And remember, this applies to both each individual card, as well as all of your cards combined. 

Need a helping hand in paying off credit card debt? Tally† helps qualifying Americans consolidate multiple credit card balances into a single line of credit, often at a lower interest rate.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.