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Your credit utilization ratio is how much you owe on all your revolving accounts, such as credit cards, compared with your total available credit — expressed as a percentage. It's important because it's one of the biggest factors in your credit score.
Good credit utilization follows the 30% rule
NerdWallet suggests using no more than 30% of your limits, and less is better. People with the best credit scores often have a credit utilization number in the single digits.
What is 100% credit utilization?
Having 100% credit utilization means that you have used all your available credit. Charging too much on your cards, especially if you max them out, is associated with being a higher credit risk. That’s why running up your cards will lower your score.
There are other ways you might accidentally reach that 100% credit utilization mark. Take this example: You have three credit cards. Card No. 1 has $5,000 of available credit, Card No. 2 has $2,000 and Card No. 3 has $3,000. You have maxed out Cards Nos. 1 and 2 and decide to close Card No. 3 since it has a $0 balance and you don’t use it often. Suddenly, your overall credit utilization jumps from 70% to 100%, risking a drop in your credit score and leaving you with no wiggle room for emergencies.
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Multiply by 100 to see your credit utilization ratio as a percentage.
For example, say you have two credit cards, both carrying a $500 balance. One card has a $2,000 credit limit and the other a $3,000 credit limit. That works out to a credit card utilization of 20%.
You can also use the credit utilization calculator below to calculate it for you, or sign up with NerdWallet to get a free weekly credit score update that shows your utilization.
Use a credit utilization calculator
There are two types of credit utilization ratios: per-card and overall. Per-card utilization measures how much of each card’s credit limit you’re using, while overall utilization takes all your cards and their limits into account.
Enter the balance and credit limit for up to three cards in this calculator to see your per-card and overall utilization figures:
» MORE: See more financial calculators from NerdWallet
Is per-card or overall utilization more important?
Both per card and overall utilization rates are important. Credit scores can take the ratio into account in both ways.
Why that’s important to know: If you try to counteract the negative effects of a maxed-out credit card by opening a new card and keeping its balance at $0, the high utilization ratio on the maxed-out card still may hurt your score.
If you avoid using more than 30% of the credit limit on any one card, the overall usage takes care of itself.
» MORE FOR CANADIAN READERS: What's a good credit utilization ratio?
How does credit utilization affect my credit score?
Credit utilization is one of the top factors used to calculate your credit score, so it’s important to keep an eye on it. Paying your bills on time and in full can keep the balances on your credit cards low and, ideally, below that 30% threshold.
Did you know...
You might have heard some people recommendthat leaving a small balance on your credit cards each month helps your credit score. This is a myth. It’s best to pay your balance in full every month. Not only will you avoid paying interest but you’ll also keep your credit utilization low, which will help your credit score.
Strategies for keeping your credit utilization low
There are some things you can do to keep your credit utilization low.
Make payments throughout the month to reduce your credit card balance. By paying a portion of your balance each week or every few weeks, it’s likely that your lowest balance will be reported to the credit bureaus. A lower balance means you’re using less of your available credit, which translates to a lower credit utilization score.
Set alerts on your credit cards. Many cards offer alerts you can set for all kinds of things, including when you’ve used a certain portion of your available credit. Set that alert to notify you once you’re close to hitting 30% (or less) to stay on top of spending.
Ask for a higher credit limit. Calling your lender to ask for a higher credit limit can be one way to provide some cushion while you pay down your balances and work toward a 30% or lower credit utilization. But, this works only if you commit to not overspending and using the newly available credit.
Add up the balances on all your credit cards. Add up the credit limits on all your cards. Divide the total balance by the total credit limit. Multiply by 100 to see your credit utilization ratio as a percentage.
First, add up all the outstanding balances, then add up the credit limits.Take the total balances, divide them by the total credit limit, and then multiply by 100 to find your credit utilization ratio as a percentage amount.
Your total credit utilization ratio is the sum of all your balances, divided by the sum of your cards' credit limits. So, for example, if you have two credit cards, each with a $1,000 limit, and owe $500 on one and $250 on the other, your credit utilization ratio is $750 divided by $2,000, or 37.5 percent.
Assuming you're able to pay your balance on time each billing cycle, a 10% utilization ratio is excellent. Lenders will likely look favorably on this as a sign you are responsible with your credit. When you stick to this ratio, you may quickly and positively impact your credit score.
To understand the concept better, let's consider a manufacturing plant. If the plant operates 24 hours a day but experiences breakdowns or maintenance for 6 hours, the Utilization Factor would be (18 / 24) * 100, resulting in 75%. This indicates that the plant is operating at 75% of its maximum potential efficiency.
How do you calculate capacity utilization? Capacity utilization is calculated using a formula: the rate of capacity utilization is equal to the ratio of the actual level of output over the maximum level of output multiplied by a hundred percent. That is, capacity utilization rate = actual output/optimal output.
Key takeaways: Closing a credit card can hurt your scores because it lowers your available credit and can lead to a higher credit utilization, meaning the gap between your spending and the amount of credit you can borrow narrows. Canceling a card can also decrease the average age of your accounts.
Every month, your card issuers report the balances on your credit cards to one or more of the three major credit bureaus — Experian, Equifax and TransUnion. This data then lands on your credit reports. When a new credit card balance is reported, the new level of credit utilization is what counts for your score.
So what's the best way to calculate utilization rate? The basic formula is pretty simple: it's the number of billable hours divided by the total number of available hours (x 100). So, if an employee billed for 32 hours from a 40-hour week, they would have a utilization rate of 80%.
When you utilize something, you use it, whether it is a tool, like when you utilize a pen to write something down, or a skill or talent, like the speed you utilize when you run a race. So utilization is the act of using, like the utilization of your voice that enables you to sing a song.
Add up all of your revolving credit balances. Add up the credit limits of all your revolving credit accounts. Divide your total revolving credit balance (from Step 1) by your total credit limit (from Step 2). Multiply that number (from Step 3) by 100 to see your credit utilization as a percentage.
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
Keeping a zero balance is a sign that you're being responsible with the credit extended to you. As long as you keep utilization low and continue on-time payments with a zero balance, there's a good chance you'll see your credit score rise, as well.
Keeping your credit utilization at no more than 30% can help protect your credit. If your credit card has a $1,000 limit, that means you'll want to have a maximum balance of $300.
Keep your credit card utilisation rate below 30%. This is the recommended percentage by credit suppliers. The percentage in question is based on all of your credit cards combined. If you have three credit cards, for example, their total credit utilisation rate should be below 30%.
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%.
The rule of thumb for credit cards is to utilize no more than 30% of the limit. 30% of a $300 limit is $90, only use this amount or less if you don't want it to adversely affect your credit score.
Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.
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