Question: I’ve been hearing a lot about credit utilization ratios. What exactly is that? –Todd

Your credit utilization ratio accounts for almost 30 percent of your credit score. This ratio is the amount of credit you’ve used compared to the total amount of credit you have available on your credit cards. An example always helps to illustrate this concept. Let’s say you have two credit cards: A and B. On credit card A, you have a balance of \$100 and a credit limit of \$1,000. On credit card B, you have a balance of \$500 and a credit limit of \$1,000.

This isn’t an exact science, of course, because so many other factors are involved. You can learn more about what makes up your FICO score on the education channel at myFICO.com.

[Resource: Get Your Free Credit Report Card]

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• http://www.creditcardrays.com Nancy

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• Beverly Blair Harzog

• JohnnKC

I have a credit card with a limit of \$2000 and a balance of \$29. I have another card with a limit of \$1000 and a balance of \$849. Combined, that’s 29.3% of utilitzation.

But, I read that if you have one card that is nearly maxed as with my account that has a \$849 balance, that will lower my credit score, too.

Is that true? If so, what is the per centage of utlization of one card that will begin to significantly damage a credit score?

I understand that it is best to keep the toatl level of utilization under 10% or not carry a balance.

• Beverly Blair Harzog

JohnnKC–First, kudos to you for keeping track of your revolving utilization ratio! And I’m especially impressed that you keep track of it by card.

It’s impossible to know the exact impact of a high utlization ratio on one card. The FICO calculation looks at many variables other than this ratio. But you’re correct that the score considers not only the total revolving utilization ratio, but the ratio on each card.

Now, the score also considers other balances within this category. These might include installment loans, for instance. So while the high ratio on that one card might, indeed, have an impact, it’s impossible to quantify it because of the other factors involved.

Your overall revolving utilization ratio is less than 30 percent, so that’s a plus for you. The
best thing to do is pay down the card with the \$849 balance so you don’t end
up paying a lot of interest. This improves your overall utilization ratio
and saves you money at the same time.

A 10 percent utilization ratio is a gold standard and certainly something to
strive for. The closer your revolving utilization ratio is to 10 percent, the better it is for your score.

I hope I didn’t put you to sleep with this slightly long-winded explanation! But you asked a great question and I wanted to be thorough. If you have a chance, I’d love to hear about your progress.

• JCulley

What about a credit utilization rate of 0%? How does that affect your credit score? For years I paid cash for everything, I did not want or need credit. The only debt I had was a student loan, so when I finally started looking at buying a house I found out I have a terrible credit score. A long credit history, but no credit cards, no loans besides the student loan, just not much of anything.

I went and got some credit cards, total available credit across all cards is \$2500. I autopay my monthly bills on them and on the 28th of each month, I pay the full balance so my credit report will show a 0% utilization rate.

Earlier research had just said “The lower the utilization rate, the better.” so I figure I can’t get lower then 0. Research said I should use each card, each month also to show I can handle having credit.

Now I am seeing that I actually need to have a utilization rate, that 0% is too low and will hurt my credit score. Which way is it?

• Beverly Blair Harzog

A revolving credit utilization ratio of o% is just fine and won’t hurt your score. Keeping it below 10 percent is the key. By paying your balance off every month, you avoid paying interest expense. That’s always a good thing!

You’re taking a sound approach to improving your credit score. It takes time, so just be persistent.

• LauraF

Good afternoon Beverly! Thank you so much for this article.. I’ve been working for two years now to build back up my credit and finally felt I had a good handle on things. Especially with understanding how important it is to keep a good balance on usage to debt ratio. I have two cards right now, one with a \$500 balance and another with a \$750 balance. I usually have on average a 15-20% credit utilization ratio and my score has been steadily inching up a few points each month. Last check I was estimated at around 644 (not great, but getting there!).

This last month I had to pay off a very large deposit on a vacation and chose to use my higher balance card to do so over a month time.. for example, I charged \$500, paid that off the next week, charged \$500 again, then paid it off.. and so forth until the \$2195 payment was complete.

My card was completely paid off after each charge, but it appears the high final payment prior to being paid off may have been reported as my current balance.. as my credit score estimate just dropped a whopping 50 points! ACK!

I’m scared I just set myself back two years of hard work! Do you suppose something like this will resolve itself when the month rolls around and I’m back to regular usage? Or has just allowing that amount to sit on my card (I believe the amount sat for two weeks before I paid off the final \$695 charge) at a time enough to bring down my credit score?

Thank you so much!
-Laura

• Beverly Harzog

Hi Laura–First, kudos for working on your credit! Second, don’t panic! Most likely, the timing of your payment caused your score to drop. You put a large amount on your card, but before your payment was credited to your account, your account activity was reported to the bureaus. This caused a higher utilization ratio so your score was impacted.

I think this set back is only temporary. Over the next few months, just check your FICO score (you can get a free estimate here on Credit.com with our Credit Report Card). Continue to be diligent about paying your bills on time and your score should get back on track within the next few months.

• LauraF

Beverly, thank you so much for the reply. This article and the entire credit.com website has been extremely helpful. I’m still keeping an eye on things, but feel much better about my prospects!

• Scott

I’d like to expand on JCulley’s question –

What builds your credit faster…Having a 0% utilization rate, or at least having a utilization rate of, say, 10% or lower?

The downside is your paying some interest, but I’ve heard that having a 0% could just as well mean your not actively using the card?

• Beverly Harzog

Hi Scott–This is a great question! The ideal way to build your credit faster (and avoid interest expense) is to use your card and pay it off during the grace period. Keep your utilization ratio under 10 percent and you’ll be in great shape.

Ironically, not using the card at all can lower your credit score. Lenders like to see that you can use a credit card and pay it off on time.

• Paul

Hi Beverly,

Greatly enjoying your knowledgeable posts on this topic! I was wondering whether you could help me out with this one.

In particular, I was wondering how the utilization ratio will be affected in the following scenario:

My limit is \$500 and I purchase something for \$350 (70% of my limit). However, I pay the \$350 within a few days my making a payment BEFORE my monthly statement comes and at the end of the month, my net balance comes out to be \$50 (10% of my limit) as a result of making several payments within the month.

In this case, is the Utilization ratio a low 10% or something else?

I have tried to find answer to this strategy of keeping the ration down, but have not found any valuable ones yet.

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