What Is a Credit Utilization Rate and Why Does It Matter?

You may have heard that a high credit utilization rate hurts your credit score, but what does that mean? What exactly is a credit utilization rate? How much does it hurt your credit score? And what can you do about it?

Your credit utilization rate, also referred to as your credit utilization ratio, refers to the amount of credit you’re currently using out of the total amount of credit available to you. It’s expressed as a percentage, so if you have a credit card with a limit of $6,000, but you currently have $3,000 outstanding on it, you have a credit utilization rate of 50% on that card.

Let’s say, however, that you also have an ‘emergency’ credit card that you never use. And let’s say it has a $4,000 credit limit. As you never use it, it has a 0% credit utilization rate, but it means your total credit limit is $10,000, but as we’ve said you’re only using $3,000 of it, so your overall credit utilization rate is 30%.

What Is a Good Credit Utilization Rate?

While there are no hard and fast rules, most experts advise trying to keep your credit utilization rate to less than 50%, and preferably less than 25%, both on individual credit cards, and overall. Experian suggests that a total credit utilization rate of less than 30% is recommended. I recently played around a little in my premium Experian account, where I can get tailored advice on how to improve my credit score. By plugging in a few numbers I was able to figure out that getting your credit utilization rate to 45% (assuming it’s currently over that) increases your Experian credit score significantly. It jumps again if you get your rate down to 25%, and again if you can manage to get it down to 7%.

It’s important to note that these numbers only apply to Experian, which is one of four different credit reporting agencies commonly used in the USA (and around the world). They are also tailored to my specific situation, keeping in mind I don’t currently have any major issues on my report that negatively impact my score. But they certainly give a general idea of the numbers you’re aiming for.

How Do I Work Out My Credit Utilization Rate?

You’ll need to look at what is referred to as revolving credit. This is essentially money outstanding on credit cards or lines of credit. It does not include other types of debt you may have such as a mortgage, student loans or a personal loan from your bank. It applies to all money that you spend on your credit card, even if you pay it off in full each month, so try not to max out credit cards, even if you can afford to pay off the bill in full by the due date. This will still result in your credit utilization rate being too high.

The percentage of the credit you’re using is based on what you have outstanding at any given time. This matters, for example, if you only use 45% of your credit limit each month, but still end up using almost 90% of it by the time your bill becomes due (at the end of your grace period). This will negatively affect your credit utilization rate, compared to if you never go above 45% at any time. You will also need to look at your rate per card and your overall rate. Both can impact your credit score.

To work out your overall credit utilization rate you’ll need to work out exactly what you currently owe on credit cards and lines of credit, and divide this by your total credit limit, across those cards. Then multiply by 100 to get a percentage. Let’s say you have a $12,000 credit limit, and currently owe $3,256.

3,256 divided by 12,000 = 0.27 (rounded to two decimal points)

0.27 x 100 = 27

Your credit utilization rate is 27%.

How Important Is My Credit Utilization Rate?

Your credit utilization rate can have a significant impact on your credit score. Different agencies use different techniques to calculate your score, but credit utilization rate can impact up to 30% of your overall credit score. It can also be one of the easier things to address to increase your credit score. Your credit utilization rate can be improved by paying off some of your revolving credit and keeping the amount you put on your credit cards lower in the future. It can also potentially improve if your card provider increases your credit limit, which they may be happy to do if you always make payments on time.

While your credit utilization rate is only part of your overall credit score, it can be useful to lower it if you’re trying to keep your credit score healthy to offer you more opportunities in the future.

Unsure why your credit score seems to be low? If you live in the U.S., don’t forget you can request a free credit report once a year.

Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen