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Many factors impact your credit score. Credit utilization, or the amount of credit used versus the total credit extended to you, is one of the most important factors impacting a credit score. Especially when you plan to use your credit to apply for a mortgage, credit card or auto loan, it remains critical to understand what credit utilization is and how it can affect your credit score.
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What Is Credit Utilization?
Credit utilization is the ratio of your overall credit balances (the amounts you currently owe to various lenders) to your credit limit (the maximum amount you’ve been approved to borrow). To calculate this rate, take the current amount you owe, divide it by your credit limit and multiply by 100.
Here’s an example: If you owe $500 on a credit card and the credit limit is $1,000, to find your utilization percentage, you’ll need to divide $500 by $1,000. That leaves you with .5. Now, you need to multiply that number by 100, which gives you 50. This means if you carry a $500 balance on a card with a limit of $1,000, your utilization will be 50%.
What Is a Good Credit Utilization Ratio?
Traditional wisdom suggests credit scores benefit most when credit utilization remains below 30%. Those who can keep credit utilization below 10% may see even better results. In general, the lower the ratio, the better. The higher the ratio, the worse the negative impact on your credit score.
How Does Credit Utilization Affect My Credit Score?
Lenders may consider you a high-risk borrower if you use more of your credit and your credit utilization rate can negatively impact your credit score if you allow it to get too high. While this is not, of course, the only factor impacting your credit, credit utilization accounts for up to 30% of your credit score.
How Much of My Credit Card Limit Should I Use?
You should aim to use no more than 30% of your credit limit at any given time. Allowing your credit utilization ratio to rise above this may result in a temporary dip in your score. Fortunately, paying it off quickly should result in your score bouncing back, although you’ll have to wait until your bank reports the new balance to the credit bureaus—depending on the bank, this can take 30 days or more.
Paying down your balance multiple times per month can also help keep your credit score lower despite a higher overall monthly credit utilization. Paying down your balance often doesn’t guarantee your credit utilization won’t rise, but it increases the odds your bank may report your card balance to a credit bureau on a day where your utilization is, in fact, lower.
How Can I Increase My Credit Card Limit?
If you find yourself using most of your credit limit regularly, it may make sense to increase your line of credit instead. Most major credit card providers offer an option to request a credit increase online, which is the easiest option, especially if you have a relatively strong case for increasing your credit—such as a long history of on-time payments. You may also request a credit increase via a phone call to your card issuer.
You can also apply for additional lines of credit or additional cards as a means of increasing your overall credit limit. Do this responsibly—applying for too many cards in too short a period of time may also have a negative impact on your credit score.
If you want to lower your overall available credit, don’t close open accounts. Closing open accounts will reduce the amount of credit you have available to you, and thus increase your credit utilization ratio. Closing older accounts may also impact your credit score in other ways; the age of your oldest active account is a factor in evaluating your credit history and the longer your history is, the better.
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Bottom Line
Your credit utilization rate affects your credit score. Try to keep your overall credit use to about 30% of your overall credit limit, if not lower. Extend your overall credit availability by applying for additional lines of credit, but don’t apply for too many at once.
FAQs
A good rule of thumb is to keep your credit utilization under 30 percent. This means that if you have $10,000 in available credit, you don't ever want your balances to go over $3,000. If your balance exceeds the 30 percent ratio, try to pay it off as soon as possible; otherwise, your credit score may suffer.
What percentage of my credit limit should I use? ›
Most credit experts advise keeping your credit utilization below 30 percent, especially if you want to maintain a good credit score. This means if you have $10,000 in available credit, your outstanding balances should not exceed $3,000.
How much limit of credit card should be used? ›
Credit Limit is the maximum amount that you can spend using your credit card at any given time. The limit is set by the credit card provider. You should aim to spend about 30% of the credit limit and never go beyond the assigned limit. This will ensure you get a good credit score.
What happens if I use 90% of my credit card? ›
Helps keep Credit UtiliSation Ratio Low: If you have one single card and use 90% of the credit limit, it will naturally bring down the credit utilization score. However, if you have more than one card and use just 50% of the credit limit, it will help maintain a good utilization ratio that is ideal.
What is the 30 rule for credit cards? ›
This means you should take care not to spend more than 30% of your available credit at any given time. For instance, let's say you had a $5,000 monthly credit limit on your credit card. According to the 30% rule, you'd want to be sure you didn't spend more than $1,500 per month, or 30%.
What happens if I use 80% of my credit? ›
Spending that approaches or exceeds your credit limit will negatively affect your credit score unless you are able to reduce your balance before the next billing cycle begins.
Is it bad to use 75% of your credit limit? ›
Using more than 30% of your available credit on your cards can hurt your credit score. The lower you can get your balance relative to your limit, the better for your score. (It's best to pay it off every month if you can.)
Is it bad to have too many credit cards with zero balance? ›
However, multiple accounts may be difficult to track, resulting in missed payments that lower your credit score. You must decide what you can manage and what will make you appear most desirable. Having too many cards with a zero balance will not improve your credit score. In fact, it can actually hurt it.
What is the ideal credit card usage? ›
What is a good credit utilization ratio? A low utilization ratio is best, which is why keeping it below 30% is ideal. If you routinely use a credit card with a $1,000 limit, you should aim to charge at most $300 per month, paying it off in full at the end of each billing cycle.
Is it bad to use too much of your credit card limit? ›
While spending over your credit limit may provide short-term relief, it can cause long-term financial issues, including fees, debt and damage to your credit score. You should avoid maxing out your card and spending anywhere near your credit limit. Best practice is to try to maintain a low credit utilization rate.
Too many credit cards for most people could be six or more, given that the average American has a total of five credit cards. Everyone should have at least one credit card for credit-building purposes, even if they don't use it to make purchases, but the exact number of cards you should have differs by person.
Is using 50% of my credit card bad? ›
It's best to keep your utilisation below 30%. This shows lenders that you're managing your credit well and are far from overspending. If you spend over 50%, it could negatively impact your credit score. And if you use over 75% of your limit, it's quite likely this will have a negative impact.
Why does my credit score go down when I use my credit card? ›
Using more of your credit card balance than usual — even if you pay on time — can reduce your score until a new, lower balance is reported the following month. Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed.
What is the golden rule when using a credit card? ›
Pay Off Your Balance
The golden rule of credit card usage is to do everything you can to pay off your entire balance each month. If you can do this, you won't be charged any interest.
Does 0 utilization hurt credit score? ›
While a 0% utilization is certainly better than having a high CUR, it's not as good as something in the single digits. Depending on the scoring model used, some experts recommend aiming to keep your credit utilization rate at 10% (or below) as a healthy goal to get the best credit score.
What is the number 1 rule of using credit cards? ›
Always Make Payments on Time
One of the most essential rules to owning a credit card is paying bills on time. A single late payment within a year of on-time payments might not seem to be much, but it could be a slippery slope that leads to debt and low credit scores and it will impact your credit.
Is it bad to use 40% of your credit limit? ›
Using more than 30% of your available credit on your cards can hurt your credit score. The lower you can get your balance relative to your limit, the better for your score. (It's best to pay it off every month if you can.)
Is it okay to use 50% of your credit limit? ›
Keeping your credit utilization below 30% protects your credit score. But if you want to boost your score as much as you can, keep your ratio under 10%. FICO scores range from 300 to 850, and my score usually fluctuates between 820 and 830.
Is it good to only use 20% of your maximum credit? ›
Your credit utilization rate — the amount of revolving credit you're currently using divided by the total amount of revolving credit you have available — is one of the most important factors that influence your credit scores. So it's a good idea to try to keep it under 30%, which is what's generally recommended.
Should you only use 20% of your credit limit? ›
Experts generally recommend maintaining a credit utilization rate below 30%, with some suggesting that you should aim for a single-digit utilization rate (under 10%) to get the best credit score.
