Credit Utilization FAQ: How Much of Your Credit Should You Use?
It can feel like the more you learn about credit cards, the more questions you have. Here’s the answer to one of the most common queries.
February 3, 2022
Figuring out how to navigate credit can be a balancing act. You don’t want to use so much of it that you’re unable to pay your bill at the end of the month, but you probably don’t want to lock your credit cards up and throw away the key, either.
Then, there’s your credit score to consider. How can you reconcile all of these points and decide how much of your credit you should use?
To know the answer, we need to understand how credit cards and scores work and which factors affect credit scoring. After covering these basics, we’ll explain how much of your credit you should use and the benefits of a good credit utilization rate.
How credit scoring works
Before we can get to the core of this article, we need to zoom out a little and explore the context around credit. You need to be careful about how much of your credit you use because this decision affects your credit score — but how exactly is your credit score determined?
A credit score is a three-digit number between 300 and 850 that represents how reliable a borrower you are according to your financial history. Credit issuers use this to make lending decisions.
Credit scoring agencies like VantageScore and FICO® Score take data from the credit bureaus — Equifax, Experian and TransUnion — to determine credit scores, accounting for various factors. Both agencies use slightly different credit scoring models, but a FICO Score depends on the following aspects in these percentages:
Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%
One of the above elements is particularly important for revealing why the amount of credit you use affects your FICO Score: Amounts owed (which is all about your credit utilization, or how much of your available credit you’re using). Although the two credit scoring models differ a little, both of them consider this metric.
Now, let’s look at what it is and why it matters.
Spotlight on credit utilization
Also known as credit utilization, the amounts you owe at the end of your billing cycle in relation to the total credit limit across all your credit cards demonstrates whether you’re a reliable and low-risk borrower. Using almost all the credit you have at your disposable indicates you could be struggling financially and using credit to get by — indicating there’s more risk you’ll default on your loans.
Credit scoring agencies calculate your credit utilization ratio. This is sometimes called a debt-to-credit ratio. It’s determined by dividing your total revolving account balances by your total available credit and then multiplying it by 100 to get a percentage.
Your credit utilization ratio only includes revolving credit accounts like credit cards. It excludes other types of credit (such as student loans or car loans, which are classified as installment credit).
For example, if you have one card with a credit card limit of $1,000 and another with a limit of $500, your total available credit would be $1,500. If you maxed out both credit cards, you’d have a credit utilization ratio of 100%. Or, if you were to end the month with a total credit card balance of $600, your credit card utilization rate would be 40%.
How much of your credit should you use?
Now we can finally answer the question we all came here for: How much of your credit should you use? You might be surprised to learn that the answer isn’t zero. Although it’s good to aim for a low utilization rate, going too low could work against you since it doesn’t give credit bureaus any data to judge you by.
Most credit experts recommend sticking to a rate of 30% or less — high enough to show that you’re actively using your credit and managing it successfully but low enough to show that you’re not dependent.
In the example we gave above with $1,500 total credit, you’d be best using no more than $450 of that credit each month if you want to keep your ratio at 30% or less. The more or less credit you have available, the more or less you can spend and keep your ratio in check. Here’s a quick summary of how much of your credit you should aim to use depending on your credit limit:
Credit limit of $300: Aim to use $100 or less
Credit limit of $500: Aim to use $150 or less
Credit limit of $1,000: Aim to use $300 or less
Credit limit of $2,000: Aim to use $600 or less
However, this is just a rule of thumb — and it represents an upper limit rather than a target. Some experts say you should aim to go below 5%.
What is the average credit utilization?
Just because "most people" are doing something doesn’t mean that you should do it, too, or feel bad for failing to measure up, but understanding “the norm” can be helpful.
One 2016 study of FICO Scores found that the median utilization rate in the U.S. is 15%, which is a decent ratio. However, it seems that the average ratio varies strongly depending on the credit scores of the individuals studied. For instance, those with exceptional credit scores (above 800) have an average credit utilization rate of just 4%.
How to use less of your available credit
If you’re worried that you normally have a credit utilization ratio above 30%, don’t panic. There are ways to remedy your situation.
The most straightforward solution is to ask for a credit limit increase. Provided you’ve been diligent with avoiding late payments and consistently paying off your balance, there’s a good chance that you could get an increase.
But there’s another solution. Credit bureaus only receive information about where your credit card balance stands at the end of your billing cycle. So, if you pay some of your balance early (before the statement closing date), you will have a lower credit utilization ratio.
Benefits of a good credit utilization rate
We’ve told you how credit scores are determined, and we’ve revealed the expert consensus on how much of your credit you should use. Yet we’ve only skimmed the surface when it comes to why it matters.
A lower credit utilization rate means you’re perceived as less risky by credit card companies, boosting your credit score. Having an excellent credit score has two principal advantages: It increases your chances of getting accepted for financial products and it means that you receive better terms after being approved.
When you have a good credit score and apply for a new credit card, issuers are more likely to give you a lower APR. This means you’ll face lower interest charges if you don’t pay off your credit card bill at the end of the month.
Because it makes you a more attractive borrower, a good credit score gives you access to the best credit cards, which might have perks like cash back. It also increases your chances of getting approved for a mortgage.
In some cases, even your landlord or a potential employer may check your credit report, which contains information about factors like credit utilization.
Master your credit
Although figuring out how much of your credit to use might seem like a trivial question at first, it can have wide-ranging implications for your financial health. Try to stay below 30%, and go even lower if you can.
If you’re committing to tidying up your credit utilization ratio, you need to be extra careful to stay on top of your credit cards — something that’s a good idea for everyone. To help you along with that mission, consider using Tally’s† credit card repayment app. The app consolidates your higher-interest credit into a single, lower-interest line of credit and manages your payments, ensuring that you always make your payments on-time.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.