It’s one of the most important components in your credit score, and one of the most misunderstood. It’s “revolving utilization”, also commonly referred to as the credit card usage percentage or the balance to limit percentage. They’re all the same thing. The way credit score model developers refer to that ratio is revolving utilization, and here’s what it is…
Revolving utilization is the relationship between your credit card balances and your credit card credit limits, expressed as a percentage. The measurement is taken two ways…line item and aggregate. In order to calculate either your utilization percentages you’ll need to see your credit report because that’s what scoring models are using as a basis for the calculation.
In order to calculate line item utilization you have to find all of your credit cards that are open or are closed but have a balance. Then, take the balance from your credit report on each of those cards and divide it by the credit limit listed on your credit report for the respective cards. So, if you have a Visa credit card with a $2,500 balance and a $14,000 credit limit then your utilization percentage on that card is $2,500/$14,000 = 18%. Do this for each of your credit cards.
In order to calculate the second type of utilization, aggregate, you’ll need to use your list from the first exercise. Take all of those cards, and then add up the balances. That’s called your aggregate balance. Then, take those cards and add up the limits. That’s called your aggregate limits. Now divide your aggregate balances by your aggregate limits and you have your aggregate revolving utilization percentage. So, for example, if you had $12,500 in aggregate balances and $42,000 in aggregate limits your aggregate utilization would be $12,500/$42,000 = 30%.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.