Sometimes, people focus so much on paying credit cards back on time and clearing balances, they ignore credit utilization. What is utilization? It refers to how much credit you use and is expressed as a percentage.

Because credit utilization can be easily overlooked, people often wonder why their credit score isn’t doing well despite paying down balances every month. However, credit utilization makes up around 30% of your score. It tells credit scoring models you’re doing a good job managing your available credit and not relying heavily on your credit cards.

In 2020, consumers’ average credit card utilization dropped to 25%, which is relatively good as it’s the lowest it has been in ten years. Find out what lower utilization means for credit scores and how it works.

Table of contents:

How is Utilization Calculated?

You can find your credit utilization rate or ratio for both by calculating the amount of revolving credit you’re using and dividing it by the total amount of credit you have available. For example, let’s say you have $21,000 available across three credit cards and you carry a balance of $11,000 across two, your overall utilization rate is 52%.

So, that’s:

 Total credit used ÷ Total credit available x 100 = utilization %

Credit utilization rates only take revolving credit into account. A revolving credit account doesn’t have a set number of payments or end date like installment credit, such as auto loans or mortgages. You have the option of paying off the balance in full every cycle or carrying over (“revolving”) the balance.

Utilization per card vs. total

There are two types of credit utilization;

  • an overall credit utilization rate
  • a utilization rate per card or per-card ratio

Knowing the difference between utilization per card, total utilization, and how it affects your credit score is critical.

Your utilization per card focuses on how much of your available credit you’re using on each separate card you have. On the other hand, overall utilization is about how much available credit you’re using across all credit card accounts. Most of the time, the focus is on the latter, but that doesn’t mean how much you’re spending on each card isn’t important.

Experts recommend not using more than 30% of your available credit. When you use close to your limit, lenders assume you’re in financial hardship and will have difficulty paying your debt back.

So, does the 30% rule apply to your overall ratio or per-card ratio? What happens if your credit utilization is 80% on one card, but you keep your overall use below 30%? Your score can still be negatively impacted. It is best to keep your utilization below 30%, for each card and overall.

How to improve utilization

If your credit utilization is too high, there are ways to improve it. You can pay off debt or raise your limits; here’s an explanation of each.

Pay off debt

While credit utilization is about how much of your available credit you’re using, carrying over a balance could make things worse. Find a way to lower your debt by paying off your balance in full every month, even if that means spending less.

If it helps, you can make a payment several times a month whenever you have extra cash. Also, spread spending across multiple cards to avoid maxing out a single card.

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Raise limits

Another trick is to raise the amount of total available credit you have, as this will lower your utilization ratio. For instance, if your credit limit is $5,000 and you’re spending $3,000 a month, your utilization is 60%. However, if you raise your credit limit to $10,000 and still leave a balance of $3,000, then your utilization drops down to 30%.

You can call your credit card company and ask them to raise your limit. Be prepared to answer questions about your annual income, housing costs, and employment status. The issuer has the right to deny a credit increase if they feel you can’t afford it or consider it risky. How much of an increase can you get? That depends on your issuer. Experian tells us the average credit card limit in America is $31, 015.

If you can’t get a limit raise, consider opening a new credit card account, but that will result in a temporary hit to your score as the company will run a credit check. Also, be careful not to open too many credit cards as lenders and credit bureaus prefer to see a mix of credit types.

Be aware that asking a creditor to raise your limit or applying for a new account will typically result in a hard inquiry on your credit report. New credit applications account only account for 10% of your score calculation. However, each inquiry you have will decrease your credit score by a few points. So, raising your limit will generally improve your score, but you may see a slight drop initially from the inquiry.

The dangers of raising limits to improve utilization

Raising your credit can be a good idea, but only if you have the discipline for it. It’s easy to give in to the temptation to increase your spending when you have more credit to use. However, if you do that, you’ll end up back in the same boat with high utilization and more debt.

Ways you unintentionally affect utilization

Sometimes, what we don’t know can negatively affect credit utilization. Here are a few scenarios where you can unintentionally affect your score.

  • Closing cards: if you’re thinking of closing an account because you can’t control your spending, consider your credit utilization first. Closing a card means you have less available credit and your utilization goes up when you carry a balance. If you close an account while still carrying a balance on that account, it is even worse for your score. Lastly, it could affect your length of credit history – 15% of your FICO score.
  • Decreasing limits: taking down your credit limit can also have adverse effects on your score. If you’re going to decrease your limit, then it’s important you reduce your spending too. Also be aware that your credit card company has the right to decrease your limits, which can negatively affect your utilization.
  • Inactive accounts: you may have a card you seldom use intentionally or unintentionally. Inactive accounts can eventually be closed and result in lower available credit. Try using them periodically so the credit card issuer doesn’t close it.

A Credit Utilization Question from a Debt.com reader…

Question: I had 72% usage on my credit accounts. All I’ve done this month is pay them down, however, today my report updated to reflect 74% usage. How is this possible? And more importantly, what the heck else can I do to make my usage go down? – Jay in California

Ashley Davison of Credit Saint responds…

This may come as a shock but: Paying your credit card when it’s due may be lowering your credit score.

One of the first things you learn about credit is the importance of revolving credit – credit cards. Love them or hate them, credit card balances account for 30% of your credit score and can make or break you depending on how you manage them.

When I work with clients, it’s not uncommon to see them with at least one maxed-out credit card. They rarely realize how dramatic the impact can be – I’ve seen as many as 100 points deducted overnight for maxed-out cards (that was my score, by the way, so I know exactly how that feels). Anything North of 50%-60% of your total limit can do this, and the closer you get to your combined credit limit the worse it gets (not to mention the ever-climbing interest rates that are being calculated at your statement closing date).

The good news

This kind of damage lasts only as long as the high balances do. Pay your balances down to 50% or better and your score snaps back once the card company and the bureaus talk to each other. They do that once a month on average, so it shouldn’t take more than 30 days to see that change. For example, the first picture below shows what is most recently reported on my credit report. The picture after is my actual statement showing a lower balance. The information will catch up but might take up to 30 days.

Every now and then, I speak with someone whose cards are showing as maxed out on their credit report, their scores are in the gutter, but in reality, they pay all of their cards to $0 every single month.

And this is where it can get tricky.

These poor folks are all being punished for doing the same thing: paying their bills on time! Your credit card company reports only once a month and surprisingly it is sometimes nowhere near your billing date. That means having to juggle reporting dates to make sure your cards aren’t running high balances when they report, or your scores could take a nosedive.

The solution

You can learn your reporting dates from your card companies, or your credit reports, but each report may have a different date for the same card. The best method for managing your balances depends on your goals.

If you have generous balances and low usage, you may not have to worry so much because there’s a nice big buffer between you and the danger zone (just above 55% of your maximum balance) where your score starts to suffer. When you make a large purchase, think about making an extra payment right afterward to keep reported balances low.

If you often see yourself coming close to your limits, try splitting your regular monthly payment in half and paying twice as often. If you have lots of regular expenditures around the same time every month, you can make a larger payment then and a smaller one, two weeks later.

Conclusion

If you are just starting out and building credit, your limits are probably low. Consider only using your card once a month to pay a bill, set your checking account to pay the card right after the bill gets paid, and then leave the card alone. These cards are just for racking up on-time payments, not shopping, so it’s useful to think of it as a credit-building tool and not a way to spend money.

This issue frustrates a lot of people, but you don’t have to be one of them. Be prepared, and make your credit card work for you.

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Article last modified on January 7, 2021. Published by Debt.com, LLC