How Your Credit Utilization Rate Is Affecting Your Credit Score

See how utilization helps determine what is a good credit score.

You might not plan on becoming a credit expert, but learning how to build and keep a good credit score is an important part of managing your borrowing. And your credit utilization rate is a significant contributing factor to your score.

Here’s what you need to know about this rate and how it could impact your credit score and report.

What Is a Credit Utilization Rate?

When researching credit scoring, you might come across questions like “What is a FICO Score?” and terms such as payment mix, credit score makeup and length of credit history. You might come across the term “credit utilization.” Your credit utilization rate refers to how much of your credit you are using, or the amount of your credit account balance compared to your available credit. In other words, a credit utilization rate is a number that represents the percentage of available credit that you’re using.

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Carrying a high balance on revolving credit products — like credit cards that allow you to borrow up to a set credit card limit — might negatively impact your credit utilization if your balance is close to that limit. A good credit score is important because borrowers with lower credit scores end up paying more on interest than individuals with higher scores. Over the life of a loan or mortgage, this can add up to tens of thousands of dollars or more.

Learn: How to Rebuild Credit

Credit Card Utilization Affects Your Credit Score

The credit scores reported by the credit bureaus consist of five different components — including your credit utilization — and each is weighted differently. Here’s a breakdown of how your credit score is determined, including how your credit utilization affects your credit score:

  • Payment history: 35 percent of your score
  • Credit utilization rate: 30 percent
  • Length of time you have had credit accounts: 15 percent
  • Amount of new credit you have: 10 percent
  • Your credit mix: 10 percent
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Your credit card utilization rate accounts for 30 percent — a significant, nearly one-third chunk — of your score. Improving your credit utilization could significantly impact your credit score. The best credit scores have an average of 7 percent utilization and an acceptable utilization rate is 10 to 20 percent.

Think Ahead: Your Game Plan for Getting the Highest Credit Score Possible

Why Is High Utilization Bad?

The amount of debt you have compared to how much debt you have is your credit utilization. Simply put, carrying high balances means you have a high credit utilization, which will negatively impact your score.

Lower Your Credit Utilization Rate

You can use a number of ways to lower your credit utilization rate and improve your score. Here are four methods to try to lower your credit utilization rate:

  1. Pay more than the minimum. Make more than the minimum required payment amount each month on your accounts to pay down your balance. A higher balance negatively impacts your credit score, so make every effort to keep your credit utilization rate as low as possible — ideally below 10 percent.
  2. Request a higher limit on your credit accounts. With a higher credit limit, even if your account balance is the same, your credit score might increase due to your lower credit utilization rate. Be careful, though — don’t let a higher credit limit tempt you to spend more.
  3. Build your credit with a secured card. You can start building credit or improve credit with a secured or limited credit card like Citi secured Mastercard or Discover secured card. Make everyday purchases and pay your bill on time — in full.
  4. Get a new credit card, use it once or twice, then pay off the balance in full. If you qualify for more credit, you can responsibly use an increase in available credit to lower your utilization rate.  Your total balance won’t change, so your utilization rate will be lower, which in time, will help your credit score.
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Patience is critical with each of these methods. It might seem like it will take forever to get credit, but with time and steady and consistent responsible credit use, your credit score will improve.

Related: Paying in Full vs. Partial Payments — Which Is Best for Your Credit Score?

Keep in mind that credit utilization is only one part of your credit score makeup. Understanding all the factors that impact your credit is empowering; knowing the potential consequences can help you can make smart decisions and feel less tempted to make poor financial choices. Work to pay high balances down, always pay on time and avoid closing old accounts.

Next Up: This Is How Many Credit Cards You Should Have 

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About the Author

Valerie Smith

Valerie Smith is a writer based in Southern California, specializing in legal, real estate, finance, and aviation topics. Valerie is a commercial pilot, FAA licensed aircraft dispatcher, FAA licensed Advanced and Instrument Ground Instructor, California real estate broker, and certified paralegal. Her work has appeared in numerous publications in print and online. A life-long California resident, Valerie holds a Bachelor of Arts degree from San Diego State University and attended Sheffield School of Aeronautics. 

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