What Is a Good Credit Utilization Ratio in 2023?
Last Updated: March 17, 2023
Are you looking to obtain a good credit card utilization ratio? But what is a good credit card utilization ratio, and how important is it for your credit score? This article addresses how to calculate and manage your credit utilization ratio (or credit utilization rate) so as not to disrupt your ability to obtain credit.
What Is a Good Credit Card Utilization Ratio?
Consider these few basic facts about the credit utilization rate.
- The credit utilization ratio is a value used to express the percentage of your credit card limits that you have used. It applies only to revolving credit, which means that you will only have one with your credit cards or lines of credit. The credit utilization ratio is not calculated with installment loans, as seen in auto loans or mortgages—these loans have a different value, known as the debt-to-income ratio.
- What is the best credit utilization ratio? Your credit score calculations are closely associated with your credit utilization ratio; it is an essential indicator of your ability to manage credit card debt. Therefore, it’s crucial to keep it within certain limits to prevent bad scoring that further influences your financial situation.
- Typically, a good credit utilization ratio is below 30%—the lower, the better. But some financial advisers claim that the ideal credit utilization ratio would be under 10%.
How Does a Credit Utilization Ratio Work?
When you obtain a credit card or another form of revolving credit, you’re given a specific limit to which you can spend. Until you start using your card, your credit utilization ratio is 0%. As soon as you make a purchase, it increases and stands for the percentage of the money you used from the available amount.
When you pay your credit card balances, your credit utilization ratio decreases, and your limit increases back to where it originally began.
There are two types of credit card utilization ratios, both of which can be taken into consideration when calculating your credit score.
- The total credit utilization ratio is the amount of money you have spent from the total credit limit available across your credit accounts.
- The per-card credit utilization ratio is applicable if you use multiple credit cards. It stands for the percentage you have used from a particular card limit you have at your disposal.
The credit utilization ratio is expressed as a percentage because it’s not important how much you have spent, but how much compared to the money you have at your disposal as a set credit limit.
So what is the ideal credit utilization ratio? A general rule is that you need a credit utilization rate of at least under 30% for a good credit score. But according to such credit scoring models as FICO, those with an excellent credit score have a credit utilization ratio under 10%.
Why Is Credit Utilization Ratio Important?
A low credit utilization ratio could bring a lot of good news your way regarding loan approval and interest rates. VantageScore and FICO score calculations are instrumental in significantly impacting your financial future. According to FICO, your credit utilization ratio makes up approximately 30% of your credit score, and VantageScore characterizes this value as ‘highly influential.’
A high credit utilization rate might indicate to potential leaders and employers that you’re prone to overspending and cannot manage your credit correctly. Consequently, this leads to doubt with your future lenders whether you’ll be able to pay off a loan, and they might end up offering you less money with higher interests.
The question, what is a good credit utilization ratio also infers staying within that ratio framework, which will help you qualify for the best offers regarding rewards or cashback credit cards.
Lenders aren’t the only ones interested in your credit score. Some employers may also use it to determine whether you’re a match for their business. In such instances, a high credit utilization rate may raise a red flag and lower the possibility of landing your dream job. So it’s important to know how to calculate your credit utilization ratio and follow the best tips to keep it within the set range.
How Is Credit Utilization Ratio Calculated?
Even though it may seem like a complex financial formula that significantly impacts your credit score, the credit utilization ratio is quite simple to calculate in a few steps.
- Take your overall credit card balances.
- Divide that number from/ with your overall credit limit.
- Multiply that number by 100 to get the percentage of your credit utilization ratio.
To incorporate the credit utilization ratio formula, for example, suppose you have two credit cards with a total limit of $10,000 ($ 5,000 each). The money you spent from it is $ 4,000. So the formula would read:
4,000 / 10,000 = 0,4
0,4 * 100 = 40
Your credit utilization ratio would be 40%.
Using the same formula, if you spend $1,000 from the first credit card and $ 3,000 from the second, you will calculate your credit utilization ratio 20% for the first card and 60% for the second.
What is considered a good credit utilization ratio entails using this simple formula, with which you’ll be able to determine if you’re in the safe zone or if you should take specific steps towards lowering your result? (You can check out what the average credit score in the US is here.)
How Credit Utilization Rates Affect Your Credit Score
Regardless of which of the credit scoring models are used, a credit utilization ratio is among the most influential factors determining your credit score.
Try to maintain the best credit utilization ratio possible by not spending much money on your revolving credit accounts. But as more factors influence your credit scores—such as credit history and available credit—there is more to maintaining a good credit score than keeping your credit utilization rate low. Therefore, to grant yourself the best loan conditions and more benefits, make sure to stay informed and follow essential advice on how to fix your credit score.
What if Credit Utilization Rates Increase?
Your credit utilization rate increases and decreases as you make purchases and pay off balances. Although this is normal, it’s still crucial to consider the question, what is a good credit card utilization ratio? And do your best to maintain it.
If you decide to splurge and spend a bit more than usual from your credit limit, it’s not the end of the world. But it’s essential to stay vigilant and not max out your credit cards. Instead, use more money than recommended from your available credit only when necessary.
An occasional increase in the credit utilization rate—especially if followed by paying off your credit card balances—is reversible and doesn’t necessarily mean you cannot restore and maintain a healthy credit utilization ratio.
If your credit utilization ratio increases at a certain point, it might not be reported to credit bureaus immediately; it depends on when your credit card company reports to credit agencies. So, for example, if your credit card issuer reports your activity when you have a high credit utilization ratio, it might be lower due to that essential factor.
But suppose in the following months, you pay back your balance and restore the recommended credit utilization ratio. In this case, after your credit card company reports new data to the credit bureaus, your credit score will also be restored.
How to Manage Credit Utilization Ratio
Consider these six simple ways to manage your credit utilization ratio correctly:
Pay your credit card balances on time—if possible, twice a month
Using this effective tactic of adding an extra monthly payment will increase the chances of having a good credit utilization percentage when your lender reports to credit bureaus. In addition, by paying your balance on time, you will, in most cases, avoid interest and save additional money. And a good question to ask yourself is: What is a good APR for a credit card?
Spread your spending across multiple credit cards instead of using just one
Having more than one credit card typically means you have more credit limits. Dividing your purchases among them will help you maintain an acceptable credit utilization ratio, both total and per card. Considering that both credit utilization rate types are essential when calculating your credit score, a high percentage on just one card can hurt it.
Don’t close revolving credit accounts unless necessary
By closing an account, you are decreasing your credit limit and thereby increasing your credit utilization rate, resulting in a lowering credit score. Before closing a credit card account, consider whether you can use it for some purchases to lower your spending on other accounts.
Ask your lender for an increased credit limit
If you’re struggling to stay within the frames of a good credit utilization ratio but don’t have trouble paying off your balances, consider asking your lender to increase your available limit. This will affect your credit utilization ratio positively, as well as your credit score. But make sure you qualify for certain conditions that a credit card company or other lenders may have set when approving higher limits.
Use your credit card
Keeping your credit utilization too low isn’t good either. If you choose not to use a credit card, it may not have a good effect on your credit profile. Credit card companies want you to use your credit card. They report your activity to credit bureaus, which allows you to have a credit history and establish a good credit score if you use it responsibly.
Open a new credit card account
One of the ways to increase your overall credit limit—without providing a bigger limit in some of your credit accounts—is by opening a new one. By the credit utilization ratio definition, getting more limits will cause your utilization rate to decrease.
But you should be careful, especially if you’re looking to increase your credit score quickly. Obtaining a new credit card, or another loan approved, requires a hard pull on your credit score, which may result in it dropping a few points.
The credit utilization ratio stands for the percentage of the money you use from your total available limit. And knowing what’s a good credit utilization ratio can go a long way. First, you can calculate your credit utilization rate and determine where you’re at and where you want to be to assess your ability to obtain credit. Then, you’re all set to make your credit utilization ratio work for you and enjoy all the privileges of maintaining a good credit score.
It’s not recommendable if you’re aiming for a good credit score. If you occasionally use about half of your total credit limit available, it’s not that bad, but try to keep it under 30%, if not less.
Having no value regarding a credit utilization rate isn’t a great solution. This indicates that you’re not using your credit card. So what is a good credit card utilization ratio? As previously noted, it would be a single digit, but not ‘0’.
Yes, it could. According to most credit scoring models, a credit utilization ratio is an essential factor used when a credit score is calculated. The less you spend of your available credit, the higher your credit score.