Credit Utilization Explained: How to Use It to Improve Your Credit Score

If you’re trying to improve your credit score, you’ve probably heard much about “credit utilization.” One of those terms gets tossed around a lot, but not everyone understands what it means or how important it is. Credit utilization is a huge part of your credit score, and knowing how to manage it can make a big difference in how lenders see you. So, let’s break down what credit utilization is, why it matters so much, and how you can use it to boost your credit score.

What is Credit Utilization?

Credit utilization refers to the percentage of your available credit that you’re currently using. Think of it this way: the amount of credit card debt you have compared to your total credit limit. For instance, if you have a credit card with a $1,000 limit and a $300 balance, your credit utilization rate is 30%. It’s a simple calculation—divide your total credit card balance by your total credit limit.

Credit utilization is a big deal because it makes up about 30% of your FICO score, the most commonly used credit score by lenders in the U.S. A high utilization rate suggests to lenders that you might be overextended and could have trouble paying back what you owe. On the other hand, a low utilization rate shows that you’re managing your credit well and not relying too heavily on it, which can help boost your score.

Why Does Credit Utilization Matter for Your Credit Score?

Credit utilization is so important because it’s a clear indicator of your credit habits. Lenders want to see that you can handle credit responsibly, and one of the ways they gauge this is by looking at how much of your available credit you’re using. If you’re maxing out your credit cards or carrying high balances, it signals that you might be at risk of defaulting. But keeping your balances low relative to your credit limits shows that you’re in control of your spending and likely to make payments on time.

Most credit experts recommend keeping your credit utilization rate below 30%. Still, those with the best credit scores tend to keep it even lower—often under 10%. For example, let’s say you have three credit cards with a total credit limit of $10,000 and a combined balance of $3,000. Your utilization rate would be 30%. If you pay down the balances to $1,000, your utilization rate will drop to 10%, which could lead to a nice bump in your credit score.

How to Calculate Your Credit Utilization Rate

Calculating your credit utilization rate isn’t hard. Just add up the balances on all your credit cards and divide that number by the total credit limits on those cards. Multiply by 100 to get a percentage. For example, if you have two credit cards—one with a $3,000 limit and a $1,000 balance and another with a $2,000 limit and a $500 balance—your total balance is $1,500. Your total credit limit is $5,000. Your credit utilization rate would be 30% ($1,500 ÷ $5,000 x 100).

It’s important to remember that credit utilization is calculated for each card and across all your cards. Even if your overall utilization is low, having a high balance on just one card can still hurt your score. Ideally, you want to keep your utilization low on each card.

Strategies to Lower Your Credit Utilization and Improve Your Score

The good news is that credit utilization is one of the more accessible parts of your credit score to manage and improve. Unlike other factors, like the length of your credit history, which takes time, you can lower your utilization rate relatively quickly.

One of the simplest ways to lower your credit utilization is to pay down your credit card balances. If you’ve been carrying a balance, pay more than the minimum each month to reduce it faster. Even paying a little extra can help lower your utilization and positively impact your score. If you have balances on multiple cards, you might consider using the avalanche method (paying off the card with the highest interest rate first) or the snowball method (paying off the smallest balance first) to knock down your debt.

Another option is to ask your credit card issuer for a credit limit increase. Getting approved increases your total available credit, which can lower your utilization rate without you having to pay down debt. For example, if you have a $1,000 limit and a $300 balance, your utilization rate is 30%. If your limit is increased to $2,000, your utilization drops to 15% without any change in spending. Many issuers like Chase, Capital One, and Discover allow you to request a credit limit increase online or through their app. However, be mindful that requesting a limit increase could result in a hard inquiry on your credit report, which might temporarily affect your score.

Opening a new credit card to increase your available credit is another strategy, but it comes with some risks. While it could lower your overall utilization, it could lead to a hard inquiry and shorten the average age of your credit accounts, impacting your score. If you open a new card, look for a good balance transfer offer, like the Citi Simplicity® Card or the Chase Slate Edge℠ Card. This can help you pay down existing balances more quickly.

Why Paying Off Your Balance in Full Every Month is Key

Paying off your credit card balance in full every month is the best way to keep your credit utilization low and your credit score high. When you pay in full, your utilization drops to zero, which is ideal. Even if you can’t pay off the entire balance, paying down as much as possible will help keep your utilization rate low.

Remember that your credit utilization is based on the balance reported to the credit bureaus, typically on your statement at the end of your billing cycle. Even if you pay in full every month, carrying a high balance can result in a high utilization rate being reported. To avoid this, consider making multiple monthly payments to keep your balance low and your reported utilization in check.

Monitoring Your Credit Utilization and Score

Keeping an eye on your credit utilization and overall credit health is crucial if you’re working to improve your score. Plenty of tools make it easy to monitor your credit.

Credit Karma and Credit Sesame are popular options that provide free credit monitoring and regular updates on your credit score. These platforms break down your credit utilization, making it easy to see where you stand and what you need to work on. They can also alert you to changes in your credit report so you can catch errors or potential fraud early.

Experian also offers a free credit monitoring service, which includes access to your FICO score and personalized tips for improvement. Many credit card issuers, like Discover, Chase, and Capital One, offer free credit score monitoring through their online portals or mobile apps, so it’s worth checking if your issuer has a similar service.

The Benefits of Keeping Your Credit Utilization Low

Maintaining a low credit utilization rate does more than just boost your credit score. A better credit score can save you money on interest rates for loans, mortgages, and credit cards, making significant financial moves like buying a house or car more affordable. It can also help you qualify for premium credit cards with great rewards, like cash back, travel points, and other perks.

A low utilization rate also gives you more financial flexibility. If an emergency arises, having available credit means you won’t have to max out your cards, which could hurt your score. Plus, some landlords and employers look at credit reports, so a strong credit score can help you secure a lease or even a new job.

Final Thoughts on Managing Credit Utilization

Understanding and managing your credit utilization is one of the most powerful steps you can take to improve your credit score. By keeping your balances low, making strategic payments, and considering ways to increase your available credit, you can take control of your credit health and set yourself up for better financial opportunities.

Remember, credit utilization is just one part of your credit picture. To achieve and maintain a high credit score, you’ll also need to make all payments on time, manage a good mix of credit types, and avoid unnecessary hard inquiries.

Credit is a tool; like any tool, it’s all about how you use it. With a solid understanding of credit utilization and an intelligent approach, you can build a credit score that opens doors and helps you achieve your financial goals.