What is the Ideal Credit Utilization Rate?

How much you owe makes up 30% of your FICO credit score. A big part of that – though not the whole thing – is how much you owe on your credit cards.

Having a low credit utilization rate is crucial to building and maintaining an excellent credit score.

Read on to learn how to calculate your credit utilization rate and how much it should be.

What is a credit utilization rate?

Your credit utilization rate is specific to your credit card usage and is meant to determine how much of your available credit you’re using.

The number is calculated by dividing your balance by your credit limit. So, if you have a balance of $3,000 on a card with a $10,000 credit limit, your credit utilization ratio is 30%.

The number is calculated based on each card you have and across all your cards collectively. For example, say you have another card with a $2,000 balance and a $3,000 credit limit. As a result, you have three credit utilization rates:

  • $3,000 / $10,000 = 30%
  • $2,000 / $3,000 = 67%
  • $5,000 / $13,000 = 38% (combined)

What is the best credit card utilization rate?

While many experts recommend keeping your credit utilization rate below 30%, “there is no hard and fast rule,” says Liran Amrany, founder and CEO of personal finance app Debitize. “In general, you want to be as low as possible, though not 0%, as then it looks like you are not using any credit at all.”

Amrany is on the right track. Experian has used its consumer data to show that those with the best credit scores use just 8% of their credit card balances. In contrast, those with a nonprime credit or worse use 59% or more of their available credit. That doesn’t mean you should keep a balance on your card. But you do need to use the card from time to time for it to be considered an active account.

How to keep your credit utilization rate just right

Your credit utilization rate is calculated monthly. As a result, “often the fastest way to improve your credit score is to improve your utilization,” says Amrany.

To make sure your credit utilization rate is just right, start by calculating it. The good news is that you don’t need a credit utilization calculator — the math is simple. Take each of your open credit card accounts and calculate your credit utilization rate by dividing the balance by the credit limit.

If you have any high rates, your next course of action depends on whether you carry a balance on your card or you pay it off in full each month:

Carry a balance

If your credit utilization rate is always high because you carry a high balance on your card, find ways to pay it down to keep it low. Consider no longer using the card in the meantime to avoid running the balance up again, especially if you’re close to maxing out your card.

Pay off in full

If you have a high credit utilization rate but always pay off your balance each month, your credit can still take a hit. One way to solve the problem, says Amrany, is to “pay off most — but not all — of your credit card balances right before your statement date.” That’s because most banks report your utilization based on your statement balance.

Some other tips to keeping your credit utilization rate low include:

Set balance alerts

For example, if you have a $10,000 credit limit and you want to keep your credit utilization rate below 15%, set an alert for when your balance reaches $1,000 so you know that you can only spend $500 more before the statement closes.

Ask for a higher credit limit

The higher your credit limit, the more you can spend on the card without running up your credit utilization rate. This is especially helpful if you have a low credit limit on a starter card. Just keep in mind that requesting a credit line increase often results in a hard credit check, which can knock a few points off your credit score.

Make payments throughout the month

Building on Amrany’s proposal, make multiple payments on your credit card throughout the month to keep your utilization rate low. This is especially helpful if you tend to use your card a lot.

Don’t believe this myth

Having a 0% credit utilization rate is not ideal because it signals that you’re not using credit at all. Because of this, some suggest that you shouldn’t pay off your whole statement balance by the due date, essentially leaving a balance each month that generates interest.

This, however, is a common misconception, says Amrany. “It’s completely false. In fact, the bureaus don’t even know if you pay your statement balance in full every month or carry a balance month to month.”

And he’s right. If you take a look at your credit report, all you’ll see is your last reported balance — again, usually your statement balance — and whether you’ve made on-time payments. There’s no mention at all of how much you paid or whether you paid the balance in full or only partially.

The bottom line

Your credit utilization rate is a big part of your credit score. Keeping it as low as possible is one of the keys to achieving excellent credit. By knowing what your rate is and using the above tips to keep it low, you’re on the right path.

If you can’t get a credit line increase or you simply want to add some available credit to lower your utilization rate, check out some of the best personal and business credit cards to see if one fits your needs.

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