What Credit Utilization Is & How to Lower It

What Credit Utilization Is & How to Lower It

Your credit score is a big determinant in improving your chances of getting some benefits in personal finance. For instance, if you want to apply for a loan with small interest rates, many lenders will check your score and report to see if you have a track record of early and constant repayment. To keep your credit score in good standing, there are some factors to look out for.

One of these factors is your credit utilization. When you understand how to control your utilization, your score can improve, increasing your chances of getting higher loan amounts with less-stringent requirements. In this article, we will discuss everything related to the credit utilization chart.

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What is Credit Utilization?

Credit utilization compares the amount you’ve used with the credit amount given by a lender. Many lenders use this term to determine if you will get an advance from them or not. It is important to mention that this utilization can be calculated with the total amount of overdraft you have.

Some of these overdraft sources include student loans, home equity loans, mortgages, and other debt sources. Therefore, if the percentage of your overdraft is high in connection to your current overdraft, then your score will be low. This term has a say on your score, so it is essential to know how to get the best rating and the perks that follow.

What is a Good Credit Utilization Ratio?

A good credit utilization ratio is the amount or percentage of the borrower’s credit used. This term reveals the borrower’s total debt when compared with the total advance amount they got from lenders. Therefore, borrowers need to know their present debt-to-income ratio. This is critical in determining if their next advance application will be approved or not.

A good rule of thumb suggests that it is best to let your utilization ratio be below 30%. Paying attention to this ratio helps you monitor your score, so you can take the necessary steps to maintain a good rating.

Calculate your Credit Utilization Ratio

When you want to perform calculations (CUR), the first step is to collate all your credit cards. Next, check out each card’s pending balances and credit limit and add up.

Also, add the total balances and divide the answer by the total limit. Then, multiply your answer by 100 to get the CUR which wi

ll be in percentage. It is also important to note that you can use an online credit utilization calculator to div out your CUR. If you register for updates, you might get your CUR alongside your overall report.

Example of Credit Utilization Ratio

Calculating this ratio is quite simple, provided you have all the features. For instance, a business owner has four cards with different credit limits. Take the Credit line as CL.

  • 1st Card: CL $4000, balance $1500
  • 2nd Card: CL $3000, balance $1000
  • 3rd Card: CL $5000, balance $1000
  • 4th Card: CL $2000, balance $500

When you add the CL for the four cards, you will get $14000. And the balance or the total CL used is $4000. Hence, the CUR is $4000 divided by $14000 multiplied by 100 to give 28.5%.

Factors that Influence Your Credit Utilization Rate

The Fair Isaac Corporation, also known as the FICO Scoring model, is one of the names to reckon with regarding credit scores. Under this scoring model, five factors control the user’s score. When you understand these factors, you will better know how to manage your score.

  • Payment History

The payment history takes 35% of the total score. Hence, it is the most crucial factor in determining the score’s calculations. The payment history simply means that your past financial decisions are used to determine what you will do in the future. Hence, factors like payment frequency, default on payment, etc., are considered. It is best to make timely and steady payments to leverage this factor.

  • Credit Utilization

This factor refers to the percentage of money the user has borrowed, accounting for 30% of the total score. People who borrow a huge amount on their cards or use up to the limit are seen as those who cannot manage their debt repayment.

  • Credit History

This factor is defined as the period when each card account was opened and the length of time since the last action on the account was performed. This length of history accounts for 15% of the total score. Therefore, if you have a longer history, lenders will be able to get more financial information, and they can predict your long-term behavior.

  • Credit Mix

When it comes to the utilization rate, this factor makes up 10% of your score. Many financial experts opine that this factor is determined by the user’s ability to repay different debt types. Therefore, if the user has good historical data, lenders consider them less risky.

  • Credit Inquiries

If anyone makes inquiries into your history, it might affect your utilization rate if it is a hard inquiry. However, soft inquiries, which are similar to background checks, do not affect scores. This factor accounts for 10% of the overall utilization rate.

 How Credit Utilization Impacts You?

Credit utilization is vital in determining your chances of getting access to funding like loans. Unfortunately, one of the reasons why some users find it hard to be trusted by lenders is their high utilization. Hence, it means they cannot be relied upon regarding debt repayment. 

Therefore, it is essential to reduce your utilization ratio to increase your score. Additionally, you can consider reaching out to financial experts to help you manage your credit to increase your chances of getting approved for loans and other forms of financing.

Some Ways to Lower Your Credit Utilization Ratio

One of the best ways to increase your score is to lower your utilization ratio. You can achieve this by setting up alerts informing you when your balance exceeds the initial limit. This will help you monitor your balances. Apart from this, here are some tips you can apply to reduce your utilization ratio that will help you take advantage of the perks that come with it.

  • Increase Your Credit Limit

If you want to lower your utilization ratio, you can request a limit increase from your lender or card issuer. More credit will be available on your account when your limit is increased. With this, your utilization ratio reduces automatically. However, you need to be cautious so that it doesn’t turn into debt in the long run because a bigger limit means you will be able to borrow huge amounts of money.

This strategy can boost your score if you keep to the terms and conditions. Generally, you can increase the limit on your card through three means. First, you can send an application online, through the phone, or accept a lender’s invitation. 

Importantly, some lenders might perform a hard inquiry, which might affect your score. So, it is essential to find out from them if they will be performing a hard or soft inquiry.

  • Pay off Your Balances as you Earn Money

One of the mistakes people make is late repayments without realizing that it is one of the best ways to reduce their utilization ratio. Hence, ensure you repay the card balances at every opportunity you get. You need to know that every time you make a payment early, you might not have to pay with interest.

If you want to make things easier for yourself, you can find out the time when your card issuer submits data to the credit bureaus.

Similarly, take note of the date when you pay each month. One of the things to know is if your account information is sent to the bureaus some days before the billing cycle ends and your balance is still high, your utilization ratio will also be high. Also, ensure you have a low balance when your billing cycle ends.

  • Apply for a New Credit Card

Another way to reduce your utilization ratio is to apply for a new credit card. It is important to note that your available credit amount increases when you have several cards connected to your account. Therefore, if your spending doesn’t reduce, your utilization ratio will also decrease. Additionally, when you apply for another card, you can take advantage of the promotional offers and bonuses that come with getting a new one.


Before you apply for a new card, it is important to know more about the application process and what to expect because not all issuers have the same requirements. Also, be prepared to submit information like your legal name, address, date of birth, annual income, social security number, etc.

FAQ

How can I improve my credit utilization?

If you think that your utilization ratio is affecting your credit score, you can always take steps to improve it. One of the ways to get started is by making prompt payments before the next billing cycle. Depending on your present needs, you can also request another card or a higher credit limit.

Is it good to have 0 credit utilization?

If you have a 0% utilization on your cards, it comes with no benefits for your score. However, you can still have a great score without 0% utilization. It is best to keep your utilization rate below 10%. If it exceeds 30%, it might affect your score.

Will lowering my credit utilization raise my score?

According to the FICO scoring model, credit utilization accounts for 30% of your score. Hence, if you reduce your card utilization, your score might increase. Having a high balance on your card can affect your score, but once you make a payment, your score is safe.

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