Your credit utilization ratio (or credit utilization rate) is the percentage of your total revolving credit you’re using. This number accounts for all types of revolving debt, including credit cards and lines of credit. Your credit utilization ratio is an important factor in determining your credit score, which helps lenders evaluate credit and loan applications.
Let’s explore how credit utilization works, how to calculate it and tips for improving your credit utilization ratio.
How does credit utilization work?
Your credit utilization ratio is impacted by debt in your revolving credit accounts. The most common example of revolving credit accounts is credit cards. Other revolving credit lines, like home equity lines of credit (HELOCs) and personal lines of credit, can also contribute to your credit utilization.
Non-revolving debt, such as personal loans, auto loans and mortgages, don’t factor into your credit utilization. They do, however, impact your debt-to-income ratio (DTI), another factor lenders may consider when you apply for credit.
How do you calculate credit utilization?
Here’s what you need to do to calculate your credit utilization:
- Review your credit card statements and other revolving credit account statements and add up your total outstanding debt
- Tally your credit limits (that’s the total amount you have access to spend via your accounts, whether you’re using that credit or not)
- Divide total debt by total credit limit and multiply that number by 100. The result is your credit utilization ratio
Let’s say you have $5,000 of revolving debt spread across various credit cards and a HELOC, with a total credit limit of $20,000. You’d divide $5,000 by $20,000 (which is .25) and multiply that figure by 100 for a credit utilization ratio of 25%.
What credit utilization ratio do lenders look for?
Lenders often consider your credit utilization when deciding whether to approve you for a loan or line of credit. In general, lenders prefer a credit utilization rate below 30%. A lower utilization ratio signals that you’re managing your debt well.
How to improve your credit utilization ratio.
Here are a few ways to help lower your credit utilization ratio:
Pay down credit card balances
Decreasing credit card debt means you’re using less of your available credit, which lowers your credit utilization rate. This can take time to accomplish.
Raise your credit limits
Since available credit is part of your credit utilization ratio, you can help lower your ratio by increasing your credit limits. You may contact your lender or card issuer to request a credit limit increase. Reliable customers who make payments on time may be more likely to receive an increase in their credit limit.
Open new lines of credit
Like asking for an increased limit, getting a new credit card is another way to raise your total available credit. That said, it’s generally best to only apply for credit when you need it.
If you’re looking to lower your debt, for example, you may consider a balance transfer card with a low introductory APR offer. If you can pay off the balance before the introductory period ends, you can help minimize the amount of interest you’ll pay.
Consider consolidating debt
Consolidating credit card debt with a personal loan can help reduce your credit utilization because a personal loan is not a revolving line of credit. Therefore, that type of debt isn’t included in your credit utilization ratio. Consolidating debt also allows you to roll credit card debts into a single monthly payment, often at a fixed interest rate, which may help simplify your finances.
Keep existing credit cards open
You may be tempted to close an older credit card you’re not using anymore. However, if that card doesn’t have an annual fee, keeping it open may be useful because it can help keep your credit utilization ratio lower.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
