What Is Revolving Utilization, and How Does It Impact Your Credit?
Revolving utilization can greatly impact your credit score, but what is it, and how do you manage it?
Justin Cupler
Contributing Writer at Tally
May 16, 2022
Many factors go into your credit score, making it difficult to understand. One important factor is your revolving utilization ratio. It goes by several names, including credit utilization ratio and credit utilization rate, but regardless of what you call it, it remains a key factor in your credit score.
We’ll cover:
What revolving utilization is
How it impacts your credit score and more
What is revolving utilization?
Before defining revolving utilization, let’s define revolving credit. This is any debt that you can withdraw from more than once up to a specific credit limit. Common examples of revolving credit include:
Credit cards
Personal lines of credit
Retail store cards
Installment loans, such as:
Personal loans
Auto loans
Home loans
Students loans and others
are not considered revolving debt.
Revolving utilization is the amount of credit you’ve used on your revolving credit accounts relative to their total credit limits.
Suppose you have two credit cards with $1,000 credit limits and $500 credit card balances on each. In that case, you’d have $1,000 in revolving debt and $2,000 in total credit limit, meaning you'd have a 50% revolving utilization rate and 50% of your available credit remaining.
How does revolving utilization impact your credit score?
Your revolving utilization weighs heavily on credit score as it’s included in the “amounts owed” factor in the FICO credit-scoring model. Amounts owed accounts for 30% of your FICO score, making it the second-most-important factor.
A high credit utilization ratio — generally accepted as anything over 30%, though FICO has no fixed percentage — can cause your credit score to fall. Conversely, the lower your revolving utilization, the more positively it’ll impact your credit score.
Is a 0% revolving utilization the best?
If a lower utilization ratio is better, then a 0% utilization ratio must be best, right? Not quite.
FICO notes that a small utilization rate can sometimes be better than no utilization at all. According to Experian, a 1% utilization rate may be the best in most cases, but it’s not necessary to have 1% utilization to maintain an excellent credit score.
How do some creditors use revolving utilization for approvals?
Your revolving utilization impacts your credit score, but it can also impact whether lenders and other creditors will approve you. Lenders will first review your credit score, but they can also use your revolving utilization in their own underwriting process.
Some lenders have specific guidelines for maximum credit utilization, and they may deny your application for credit or give you a higher interest rate if your revolving utilization is too high. This can happen even if you have a good credit score.
How can you keep your revolving utilization low?
Using your credit card accounts can be beneficial if done responsibly. You can earn valuable rewards points, keep your credit history consistent and even stabilize your budget if you live off a variable income.
If you’re looking to responsibly use your credit card and keep your revolving utilization low, you have two options.
Limiting how much you use your card each month
For example, if you have a $5,000 credit limit and you want to maintain a 10% credit utilization, you can decide that you won’t charge more than $500 on your credit card each month and will pay off the balance in full by the due date.
Paying down some of your balance before the end of your billing cycle
As Experian notes, most credit card companies will report your balance to the credit bureaus about the time your billing cycle ends. The end of the billing cycle is sometimes called the statement close date. So to keep your utilization low, you can pay down some of your balance before this time.
For example, if you have a $1,000 credit limit and charge $500 to your card, you would have a 50% credit utilization rate. To lower this before it’s reported to the credit bureaus, you could make a $400 payment toward your balance before your statement close date. Then, after you receive your statement, you could pay the remaining $100 by the due date.
Why does your actual revolving utilization differ from your credit report?
Your revolving credit issuers will report your balances monthly to the three credit bureaus — Experian, Equifax and TransUnion. However, your actual utilization may differ from what your credit report reflects because it depends on when the lender reports your balances and when you make your monthly payment.
For example, if your credit card company submits balances to the credit bureaus when it prints the monthly statements, but you wait until the due date to pay off the statement balance, your revolving utilization rate will be based on what it was when the creditor printed your statement.
This can make it difficult to maintain a low revolving utilization ratio. You can overcome this by contacting your creditor and asking when they report balances, then scheduling a payment before that date.
What can you do if your revolving utilization is too high?
If your credit card use got a little out of control and you now have a high revolving utilization rate, you can rein it in using a few methods.
Personal line of credit
A personal line of credit is a credit line with an interest rate that’s lower than most credit cards. You can use this to pay off your high-interest revolving debts, potentially reducing your monthly payments and paying them down to your target utilization ratio more quickly.
Debt consolidation loan
A debt consolidation loan is a personal loan you can use to pay off your high-interest credit cards and potentially get a lower interest rate. This could not only lower the interest you’ll pay, but it could also immediately lower your credit card utilization rate because a debt consolidation loan is an installment debt.
Debt avalanche
Using the debt avalanche method, you can chip away at your revolving utilization ratio. In this method, you apply all your extra money to the debt with the highest interest rate while making the minimum payments on all your other debts. Once you pay off that debt, you apply your extra funds to the debt with the next highest interest rate.
Repeat this process until you reach your ideal revolving utilization ratio.
Debt snowball method
The debt snowball method is similar to the debt avalanche, except you apply your extra money to the debt with the lowest balance. Once you pay off that debt, you then move on to the debt with the next lowest balance all while paying the minimum payments on your other debts.
Continue this process until you reach the credit utilization ratio you’re targeting.
Balance transfer
If you have access to a credit card with a 0% APR balance transfer promotion, you can transfer your high-interest debt to this card to save on interest. With 0% APR, you can easily calculate the amount you must pay monthly to pay off the debt within the promotional period. The promotional period is typically between 12 and 18 months.
For example, if you transfer $2,000 in debt to a 0% APR card with an 18-month promotion, you’d pay just $111.11 per month to pay off the debt within the promotional period.
Keep in mind that these cards often charge a 3% to 5% balance transfer fee, so calculate that into your repayment time.
Credit limit increase
You can also contact your credit card issuers and request credit limit increases. You can do this several ways. Some credit card companies allow these requests online, but you can also call customer service to request it.
This could almost immediately result in higher credit limits, which could lower your credit utilization rate.
A low revolving utilization could be the key to good credit
Your revolving credit utilization is a piece of the “amounts owed” variable in the FICO scoring model. Amounts owed is the second-most-critical variable in your FICO score, so keeping it as low as possible is important for future borrowing.
If your revolving utilization ratio is high, you can lower it by paying down credit card debt. The Tally†credit card payoff app helps you manage your credit card payments — and Tally offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards.
†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.