How Your Credit Utilization Ratio Impacts Your Credit Score

6 Min Read | Last updated: November 30, 2023

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Learn how your credit utilization ratio, a key factor in determining your credit score, is calculated and how to lower it with these simple steps.

At-A-Glance

Your credit utilization ratio is the amount of credit you’re using compared to your available credit.
The credit utilization ratio typically accounts for 30% of your credit score.
You may be able to reduce your credit utilization ratio by paying down your credit card balances or getting a credit limit increase with a new or existing credit card.

When lenders and credit card issuers evaluate you as a potential customer, they’re largely interested in your credit score, the number that determines your creditworthiness. And one of the biggest factors that goes into computing your score is your credit utilization ratio, sometimes called your credit card utilization ratio.

Once you understand how to calculate your credit utilization ratio you can take steps to improve it, which in turn can help boost your credit score. That’s the end goal, since the higher your credit score, the more likely it is you’ll be approved for credit cards and loans – and the more likely you’ll get better terms, too.

Here are five steps to help you take control of your credit card utilization ratio.

Step 1: Understand Why Credit Card Utilization Ratios Matter

When you apply for a credit card, a loan, and sometimes even when you’re setting up a cell phone plan or an account with a utility, the creditor or business checks your credit score to assess if you’re going to be a good client who pays your bills on time. A credit score is what the financial world turns to most; it’s a three-digit rating that ranges from 300 – very poor – to 850 – excellent credit.

Your credit utilization ratio is an important factor in calculating your credit score. The ratio represents the fraction of your total available credit limits on all your credit cards – and other revolving debt, if you have any – that you currently use. The smaller the fraction, the better.

If you’re not yet fluent in credit scores, check out “How is a Credit Score Calculated?”

Step 2: Calculate Your Credit Utilization Ratio

A good way to calculate your credit utilization ratio is to create a two-column worksheet that lists your current balance and maximum credit limit for each credit card. The credit limit appears on your monthly statement. Then:

Add up all your current balances.
Add up all your maximum credit limits.
Divide the total of your outstanding balances by the total of your credit limits.

Here is a quick example:

Card A has a $1,000 balance and a $5,000 limit.
Card B has a $500 balance and a $10,000 limit.
Card C has a $2,000 balance and a $12,000 limit.
Total balances equal $3,500, and the total credit limit is $27,000.
Divide $3,500 by $27,000, and, voila, the credit utilization ratio is 13%.

Step 3: Aim for a Low Credit Utilization Ratio

So, what’s a good utilization ratio? Great question, but alas, there is no exact target for a good credit usage ratio. As a general rule, keeping it below 30% is considered a smart move.

If your credit card utilization ratio is above 30%, working to lower it may help improve your credit score.

But this doesn’t mean that you should aim for 0%. In some cases, having a low credit utilization ratio could have a more positive impact on your FICO Scores than not using any available credit at all.¹ Seem a bit crazy? Well, if you look at this from the vantage point of the credit scoring algorithms, being able to see how well you manage available credit can say more about your ability to use credit responsibly than if you don’t use the credit at all.

Step 4: Pay Down Card Balances to Reduce Your ‘Numerator’

One way to lower your credit utilization ratio is to reduce your total balance, which is the numerator of the fraction credit bureaus use when calculating your credit usage ratio. The numerator is the number above the line of a fraction, and the denominator is the number below the line. The smaller the sum of your balances, the lower your credit usage ratio will be.

The Debt Avalanche method is an accelerated way to pay down debt.² You would pay the monthly minimum due on every card – on time – and then add more to the payment for the card that charges you the highest interest rate. When the high-rate card balance is wiped out, send the extra money to the card with the next-highest interest rate.

Step 5: Consider Asking for a Credit Limit Increase to Raise Your ‘Denominator’

Another way to lower your credit utilization ratio is to increase your total available credit limit, which is the denominator in calculating your usage.

For instance, if Jane has $3,000 in outstanding balances and her maximum combined credit limit on all her cards is $10,000, she has a utilization ratio of 33% – or $3,000/$10,000. If she’s approved for a $1,500 credit limit increase on one of her cards, her total credit limit rises to $11,500. Assuming she doesn’t increase her spending, the same $3,000 balance means her credit utilization ratio will drop to 26% – $3,000/$11,500.

Of course, Jane’s strategy should only be considered if you are rock-solid confident that you won’t use the higher credit limit as a license to spend more.

Another way to increase your total available credit limit is to apply for a new credit card. Again, that only makes sense if you are sure you can afford the new limit and won’t be tempted to overspend. If you go this route, keep in mind that there may be a small temporary decline in your credit score when you open a new credit card account. Opening a new credit card can cause a shift in the age of your credit history, and the hard inquiry used to apply for the new card can also drop your score temporarily, but with responsible use, your score may increase over time.

You can also prioritize your credit health with American Express MyCredit Guide. With the easy-to-use FICO^® Score Simulator, you can track possible impacts to your FICO^® Score for free before making big financial decisions. (FICO is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.)

American Express MyCredit Guide. Your FICO Score and credit report, for free. With Identity Monitoring, insights & tools, and real-time alerts. Enroll Now

The Takeaway

Your credit utilization ratio – the fraction of your total credit limit that you’re using at any time – has a strong influence on your credit score. Taking these five steps can help you calculate, manage, and improve your credit utilization ratio.

¹ “What is Amounts Owed?,” myFICO.com

² “Debt Avalanche vs. Debt Snowball: What’s the Difference?,” Investopedia

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Carla Fried is a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among many other media outlets.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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