How Your Credit Utilization Rate Is Affecting Your 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.

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 also 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.

Your credit utilization can be calculated by dividing your current total balance on all your lines of credit by the total amount you can borrow on all your lines of credit. For example, if you have two credit cards with credit limits of $500 and $1,000 and you have a $300 balance on one and a $150 balance on the other, then your credit utilization is (300+150) ÷ (500+1000) = 0.3 or 30%.

Why Is High Utilization Bad?

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 score if your balance is close to that limit. A good credit score is important because borrowers with lower credit scores end up paying more 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.

How Credit Card Utilization Affects Your Credit Score

The credit scores reported by the credit bureaus consist of five 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 card utilization affects your credit score:

• Payment history: 35%
• Credit utilization rate: 30%
• Length of time you have had credit accounts: 15%
• Amount of new credit you have: 10%
• Your credit mix: 10%

Your credit card utilization rate accounts for 30% — a significant chunk — of your score. Improving your credit utilization could significantly impact your credit score. 

Lower Your Credit Utilization Rate

If you currently have a high credit utilization rate and are looking to take out a mortgage or car payment, it may be a good idea to lower your utilization rate first to avoid paying higher interest. You can use several ways to lower your credit utilization rate and improve your credit score. Here are five methods to try:

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%.
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 it 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 will help your credit score in time. However, when opening new accounts, be careful. When calculating your score, credit bureaus take into consideration how often lenders, such as credit card companies view your credit report. A large number of hard inquiries in a short period can negatively affect your credit score. Therefore, it may be better to only apply for new credit card offers from companies that are likely to accept your application to minimize this effect.
5. 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.

Final Take

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

Chris Ozarowski contributed to the reporting for this article.

Information is accurate as of Oct. 21, 2022.