Revolving utilization is an important factor that can impact your credit scores. It’s often the main reason your credit scores change from month to month. But utilization can be confusing, so let’s break it down here and help you use it to your advantage.
If you’ve seen the FICO score formula, debt is one of the top factors that affects credit scores (second after payment history) and utilization is a major part of that calculation.
What is a Good Revolving Utilization Rate?
Revolving utilization (a.k.a. debt usage or debt utilization) looks at the balances on your revolving accounts, mainly credit cards, and compares them to your available credit. It’s not necessarily a representation of your debt, though, because this factor can impact your credit scores even if you pay your balances off in full each month. (More on that in a moment.)
Revolving utilization compares the balance on each of your credit cards to your credit limit. Here’s a simple example:
Credit card balance: $350
Credit card limit: $1000
Utilization = 35%
To get to this formula, just divide your balance by the credit limit and move the decimal two spaces to the right. In our example:
350 divided by 1000 = .35
Move the decimal point two space to the right to get 35%
You may have seen articles referencing 20, 25 or even 30% or less as good utilization percentages but the real answer is “it depends.” There are many different scoring models and they will take into account all the information in your credit profile. An acceptable utilization ratio for one person may be a little too high for another.
For most people, though, a low credit utilization ratio means keeping balances to less than 20— 25% of available credit. Usually a utilization ratio in that range will contribute to a good credit score.
Per-Card Utilization vs Total Utilization
Credit card utilization is calculated both on individual revolving credit accounts as well as on all revolving accounts added together. Most credit scoring models will compare total revolving balances to total credit available. That means overall credit utilization is important.
Just like one rotten piece of fruit can make the whole batch go bad, one card with high utilization can cause this factor to bring down your credit scores. This article, A Little Known Trick That Can Improve Your Credit Scores This Month, includes a real-life example of how that happens.
If you have one card with utilization that is much higher than others and your primary goal is to build or maintain strong credit scores, you may want to focus on paying that card with a high balance down first before you pay extra on others.
On the flip side, if this factor is not bringing down your credit scores, don’t obsess about it. Usually when you check your credit scores, you’ll be given the main factors impacting your scores and if utilization or balances aren’t on the list you may not need to do anything.
It’s a good idea to check and monitor your credit reports and scores with all three major credit bureaus: Equifax, Experian and Transunion. Read: 138+ Places To Check Your Free Credit Scores
5 Ways to Improve Your Credit Utilization Rate
It is important to keep in mind that this factor is based on the balances and credit limits that appear on your credit reports at the time your credit score is calculated. Most credit card companies report balances on a monthly basis, around the time your credit card billing statement closes. That date is listed on your credit card statement. You’ll understand why that is important in a moment.
Also keep in mind that the type of credit matters here. Installment loans (such as car loans or mortgages) don’t calculate utilization the same way. The focus here is primarily on credit cards and lines of credit. Home equity lines of credit may be included but not always.
Given that background, here are six strategies for improving your credit utilization rate:
- Pay down credit card debt. Paying down revolving debt balances and keeping them low is a great way to improve utilization. It can also be a quick way to improve your credit scores if debt usage is bringing them down.
- Request a credit limit increase. A higher credit limit can improve utilization on an individual account as well as contribute to a higher total credit limit. Most credit scoring models are not that concerned about whether you have “too much credit available,” though VantageScore does evaluate this factor.
- Open a new credit card. Use a balance transfer on a new card to help pay down a credit card with a higher balance. If you get a low interest rate balance transfer you may also save money on interest.
- Refinance credit cards with a personal loan. As mentioned, utilization primarily applies to credit card accounts. A personal loan is usually classified as an installment account, so using one to pay off credit cards may be beneficial. (There’s no guarantee, however.)
- Pay earlier. Remember when we mentioned that most credit card issuers report at the close of the billing cycle? That means that if you pay your card around the due date, that month’s payment will arrive too late to reduce the balance that is reported. Instead you may want to make a payment online several days before the close of the billing cycle to help reduce the balance that is reported.
- Use a business credit card for business financing. Many small business credit cards don’t report to personal credit unless you don’t pay the debt. That means balances you carry on those cards won’t hurt your personal credit scores though they may affect some business credit scores.
How Opening A Business Credit Card Could Help Your Revolving Utilization
Let’s expand on the last point in that list of options. Many small business credit cards don’t report to the cardholder’s personal credit reports as long as the debt is paid in a timely fashion. A few don’t ever report personal credit.
Most small business credit cards do require a personal credit check and a personal guarantee, however. You’ll find a chart describing how business credit cards report to personal credit here.
In case you’re wondering, some business credit scores also evaluate utilization, but not all do. In addition, business credit reports generally don’t include credit limits. Instead, a recent high balance is often used as a proxy.