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Many factors impact your credit score. Credit utilization, or the amount of credit used versus the total credit extended to you, is one of the most important factors impacting a credit score. Especially when you plan to use your credit to apply for a mortgage, credit card or auto loan, it remains critical to understand what credit utilization is and how it can affect your credit score.
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What Is Credit Utilization?
Credit utilization is the ratio of your overall credit balances (the amounts you currently owe to various lenders) to your credit limit (the maximum amount you’ve been approved to borrow). To calculate this rate, take the current amount you owe, divide it by your credit limit and multiply by 100.
Here’s an example: If you owe $500 on a credit card and the credit limit is $1,000, to find your utilization percentage, you’ll need to divide $500 by $1,000. That leaves you with .5. Now, you need to multiply that number by 100, which gives you 50. This means if you carry a $500 balance on a card with a limit of $1,000, your utilization will be 50%.
What Is a Good Credit Utilization Ratio?
Traditional wisdom suggests credit scores benefit most when credit utilization remains below 30%. Those who can keep credit utilization below 10% may see even better results. In general, the lower the ratio, the better. The higher the ratio, the worse the negative impact on your credit score.
How Does Credit Utilization Affect My Credit Score?
Lenders may consider you a high-risk borrower if you use more of your credit and your credit utilization rate can negatively impact your credit score if you allow it to get too high. While this is not, of course, the only factor impacting your credit, credit utilization accounts for up to 30% of your credit score.
How Much of My Credit Card Limit Should I Use?
You should aim to use no more than 30% of your credit limit at any given time. Allowing your credit utilization ratio to rise above this may result in a temporary dip in your score. Fortunately, paying it off quickly should result in your score bouncing back, although you’ll have to wait until your bank reports the new balance to the credit bureaus—depending on the bank, this can take 30 days or more.
Paying down your balance multiple times per month can also help keep your credit score lower despite a higher overall monthly credit utilization. Paying down your balance often doesn’t guarantee your credit utilization won’t rise, but it increases the odds your bank may report your card balance to a credit bureau on a day where your utilization is, in fact, lower.
How Can I Increase My Credit Card Limit?
If you find yourself using most of your credit limit regularly, it may make sense to increase your line of credit instead. Most major credit card providers offer an option to request a credit increase online, which is the easiest option, especially if you have a relatively strong case for increasing your credit—such as a long history of on-time payments. You may also request a credit increase via a phone call to your card issuer.
You can also apply for additional lines of credit or additional cards as a means of increasing your overall credit limit. Do this responsibly—applying for too many cards in too short a period of time may also have a negative impact on your credit score.
If you want to lower your overall available credit, don’t close open accounts. Closing open accounts will reduce the amount of credit you have available to you, and thus increase your credit utilization ratio. Closing older accounts may also impact your credit score in other ways; the age of your oldest active account is a factor in evaluating your credit history and the longer your history is, the better.
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Bottom Line
Your credit utilization rate affects your credit score. Try to keep your overall credit use to about 30% of your overall credit limit, if not lower. Extend your overall credit availability by applying for additional lines of credit, but don’t apply for too many at once.
FAQs
A good rule of thumb is to keep your credit utilization under 30 percent. This means that if you have $10,000 in available credit, you don't ever want your balances to go over $3,000. If your balance exceeds the 30 percent ratio, try to pay it off as soon as possible; otherwise, your credit score may suffer.
What percentage of my credit limit should I use? ›
Experts generally recommend maintaining a credit utilization rate below 30%, with some suggesting that you should aim for a single-digit utilization rate (under 10%) to get the best credit score.
How much limit of credit card should be used? ›
Credit Limit is the maximum amount that you can spend using your credit card at any given time. The limit is set by the credit card provider. You should aim to spend about 30% of the credit limit and never go beyond the assigned limit. This will ensure you get a good credit score.
What is the 30 rule for credit cards? ›
This means you should take care not to spend more than 30% of your available credit at any given time. For instance, let's say you had a $5,000 monthly credit limit on your credit card. According to the 30% rule, you'd want to be sure you didn't spend more than $1,500 per month, or 30%.
How much of a $300 credit limit should I use? ›
You should try to spend $90 or less on a credit card with a $300 limit, then pay the bill in full by the due date. The rule of thumb is to keep your credit utilization ratio below 30%, and credit utilization is calculated by dividing your statement balance by your credit limit and multiplying by 100.
Is it bad to have too many credit cards with zero balance? ›
However, multiple accounts may be difficult to track, resulting in missed payments that lower your credit score. You must decide what you can manage and what will make you appear most desirable. Having too many cards with a zero balance will not improve your credit score. In fact, it can actually hurt it.
Is it bad to use over 50% of your credit limit? ›
Using more than 30% of your available credit on your cards can hurt your credit score. The lower you can get your balance relative to your limit, the better for your score. (It's best to pay it off every month if you can.)
What happens if I use 90% of my credit card? ›
Helps keep Credit UtiliSation Ratio Low: If you have one single card and use 90% of the credit limit, it will naturally bring down the credit utilization score. However, if you have more than one card and use just 50% of the credit limit, it will help maintain a good utilization ratio that is ideal.
What if I use 100% of my credit card? ›
While it is permissible to use 100% of your credit card limit, it is not recommended. Maxing out your credit card can adversely impact your credit score, limiting future borrowing options. Moreover, a high outstanding balance incurs substantial interest, putting you at risk of falling into debt.
What is the ideal credit card usage? ›
Most credit experts advise keeping your credit utilization below 30 percent, especially if you want to maintain a good credit score. This means if you have $10,000 in available credit, your outstanding balances should not exceed $3,000.
Pay your balance every month
Paying the balance in full has great benefits. If you wait to pay the balance or only make the minimum payment it accrues interest. If you let this continue it can potentially get out of hand and lead to debt. Missing a payment can not only accrue interest but hurt your credit score.
How much should I spend if my credit limit is $1000? ›
How much should I spend if my credit limit is $1,000? The Consumer Financial Protection Bureau recommends keeping your credit utilization under 30%. If you have a card with a credit limit of $1,000, try to keep your balance below $300.
What habit lowers your credit score? ›
Actions that can lower your credit score include late or missed payments, high credit utilization, too many applications for credit and more. Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
What is a realistic credit limit? ›
If you're just starting out, a good credit limit for your first card might be around $1,000. If you have built up a solid credit history, a steady income and a good credit score, your credit limit may increase to $5,000 or $10,000 or more — plenty of credit to ensure you can purchase big ticket items.
How often should I use my credit card? ›
Frequently asked questions
While it depends on the issuer, you should use your card at least once every few months to keep it active.
Can I use 75% of my credit limit? ›
Yes, high credit utilisation is bad for your credit score. In general, it is advised to keep the utilisation under 30% of the overall credit limit.
Is it bad to use 75% of your credit limit? ›
Using more than 30% of your available credit on your cards can hurt your credit score. The lower you can get your balance relative to your limit, the better for your score. (It's best to pay it off every month if you can.)
Is it bad to use 80% of credit limit? ›
Key takeaways. Your credit utilization ratio is the amount of credit you've used compared with the amount you have available on your credit cards. If your credit utilization ratio exceeds 30%, it can hurt your credit score. There are several ways to lower your credit utilization, which can improve your credit score.
Can I use 80% credit limit? ›
Typically very high utilization, say more than 70/80% of your overall limit may negatively impact your credit score. "Very high utilization may result into you missing the payments and hence, is always seen cautiously by lenders. Timely repayment of your dues is very critical to maintain and improve your credit score.
What is 30% of the $200 credit limit? ›
If you have a $200 credit limit, keeping your balance below $60 will ensure a credit utilization ratio below 30%, which will help you build good credit when paired with on-time monthly payments.
