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What is Credit Utilization?

The credit utilization ratio, often referred to as your credit utilization rate, can be defined as the amount of revolving credit that you’re currently using, divided by the amount of total revolving credit that you have available.

It’s simply how much you owe divided by the credit limit. The figure is usually expressed as a percent.

How revolving credit works

If you have a total of $10,000 of credit available on two cards with a credit limit of $5,000 on one card, the credit utilization ratio is 50 percent; that is, you’re using only half of your available credit.

You can calculate your all-inclusive credit utilization percentage and the rate for each of your credit cards.

Credit scoring models usually look at your credit utilization in making a credit score calculation for you. Credit utilization rate can affect as much as 30% of your credit score. It is one of the elements that credit unions look at when calculating your credit score.

How to interpret credit utilization

A low rate means you’re making use of less of the credit you have available. Credit scoring models typically consider this to mean you’re doing a great job in managing credit.

Keeping your spending under control will help you achieve higher scores on your credit. Higher credit scores could aid in obtaining additional credit, like mortgages, auto loans, and credit cards that have favorable terms.

Revolving Credit

“Revolving credit” is so named as it isn’t subject to an established end date. The amount you owe is carried forward (revolves) each month.

Every month, you’re able to take out a loan against your limit on the credit, which reduces your credit limit. You can then pay back all or a portion of it, then borrow against the amount you have available.

If the account remains in good condition and you’ve not exceeded the limit of your credit, then you’ll be permitted to borrow more using either your card from credit or credit line.

Each month, you’ll be charged an interest rate on any credit that you use. If you pay off your credit card bills in full every month, you will not incur any interest costs, and the rate of credit utilization will remain minimal.

Although your rate is usually a measure of the total amount of credit you use against the total available credit, your credit limit using individual cards is also crucial.

The per-card rate will be determined in the same method as your total utilization rate, however, it’s calculated by comparing the amount of credit on the individual credit card with available credit on the card.

What is a Good Rate?

In the case of a FICO(r) Score, it is generally recommended to keep your overall credit utilization below 30 percent. For instance, if your credit limit totals $10,000, your revolving balance shouldn’t be more than $3,000.

In general, a low ratio is an indication that you’re doing a great job in managing your credit obligations since you’re not in the habit of excessive spending. If you have a higher ratio can be a signal to creditors or lenders that you’re struggling to manage your financial affairs.

Should You Consider Opening Credit Card accounts to increase your Credit Utilization Rate?

You can control your credit card utilization in the following ways:

The balances on your credit cards should be paid each month in full

Keep in mind that even if you’re not able to completely back to zero each month and keep the balance as small as you can help you continue to move in the right direction and avoid accruing an excessive amount of debt.

  • Maintaining credit accounts open that are in a state of zero balance
  • This is important even if you’re not planning to make use of them.
  • Request for an increase in credit from your credit card issuer
  • Open new credit accounts


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