Your credit card balance is not the only number that matters when it comes to your credit profile. The amount of available revolving credit you are currently using can also be important.
This measurement is commonly known as the credit utilization ratio.
Understanding credit utilization can help you better manage credit card balances and prepare for future borrowing.
What Is Credit Utilization?
Credit utilization is the amount of revolving credit you are using compared with your total available credit.
For example, suppose you have two credit cards:
- Card 1 limit: $5,000
- Card 2 limit: $5,000
- Total available credit: $10,000
- Combined balances: $2,500
Your overall utilization would be 25%.
The calculation is:
Credit utilization = Total credit card balances ÷ Total credit limits × 100
Credit scoring models can consider how much of your available credit you are using.
Why Can High Utilization Matter?
Using a large percentage of your available credit can be viewed as a sign that you may be relying heavily on revolving credit.
For example, someone with a $10,000 total credit limit and a $9,000 balance has a much higher utilization ratio than someone with the same limit and a $1,000 balance.
The exact effect can vary because different lenders and scoring models use different methods to evaluate credit information.
How Can You Lower Your Utilization?
One straightforward approach is reducing your credit card balances.
If you have enough money available, making payments before the statement closing date may also affect the balance that gets reported, depending on the card issuer’s reporting practices.
However, you should not sacrifice essential expenses or emergency savings simply to change a credit utilization percentage.
Your overall financial situation matters more than one credit metric.
Don’t Automatically Close Credit Cards
Closing a credit card can reduce your total available credit.
For example, imagine you have two cards with combined limits of $10,000 and $3,000 in balances.
If you close a card with a $5,000 limit while keeping the same $3,000 balance, your available credit could fall to $5,000.
That could increase your overall utilization significantly.
This is one reason it can be useful to consider the broader effect before closing an existing account.
Credit Limits Can Also Affect Utilization
If your income and credit profile have changed, you may consider asking a card issuer whether you qualify for a higher credit limit.
However, a higher limit should not be viewed as an invitation to increase spending.
If the balance increases along with the credit limit, the potential benefit of the higher limit may disappear.
Responsible spending and repayment remain important.
Utilization Can Change From Month to Month
Credit utilization is not necessarily a permanent number.
Your balance can change every month as you make purchases and payments.
For example, someone may have a high balance one month because of a large expense and a much lower balance the next month after making payments.
Because credit information can be reported at different times, the balance appearing on a credit report may not always match the balance you see at a particular moment.
Avoid Maxing Out Credit Cards
Using most or all of a credit card’s available limit can result in a high utilization ratio.
If you regularly approach your credit limits, consider reviewing your spending and repayment plan.
High balances can also make monthly interest costs more difficult to manage when balances are carried from month to month.
Final Thoughts
Credit utilization is one part of your overall credit profile.
Keeping revolving balances manageable, making payments on time, and understanding your available credit can help you develop better credit habits.
There is no universal utilization percentage that guarantees a particular credit score or loan rate because scoring models and lender requirements differ.
Instead of chasing a specific number, focus on responsible credit use and paying down balances that you can reasonably afford.