What is a credit utilization ratio?

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Credit utilization is a ratio of your debts from revolving accounts to your total credit line limits. If you have one credit card, your credit utilization ratio is the balance on your credit card relative to that card’s credit line. If you have more than one credit card, your credit utilization ratio is the total of your combined balances relative to your total credit limit across all your credit cards.

This ratio is expressed as a percentage and is considered the second most important credit scoring factor in your FICO score, after payment history. As a key factor in determining your creditworthiness, it’s important to know what a good credit utilization ratio is and how to maintain it in order to build a good credit score.

Here’s what you need to know about credit utilization, why it’s important and how to keep a good credit utilization ratio.

Why is a credit utilization ratio important?

According to the FICO scoring model, your credit utilization ratio accounts for 30 percent of your credit score. It’s based on your revolving credit — your credit card usage and lines of credit. This means that when FICO pulls information from your credit report to calculate your credit score, the ratio of your current balances to your total credit line determines nearly a third of the calculation.

Credit utilization is a key factor in your credit score because it demonstrates how you use the credit that’s available to you. If your credit utilization ratio is low, it’s an indicator that you’re managing credit well and aren’t prone to overspending.

If, on the other hand, you tend to max out your credit cards, your high credit utilization ratio may make lenders wonder if you’re under financial stress. Your high balances can also indicate that you’re borrowing more than you can pay off.

What is a good credit utilization ratio?

If your credit utilization ratio is so central to your credit score, what is the exact number you should aim for to have a good credit score? A good rule of thumb is to keep your credit utilization under 30 percent. However, this rule is not set in stone.

While the 30 percent rule can be a good benchmark, it’s best to aim to keep your credit utilization as low as possible — ideally in single digits.

“It’s often recommended to keep your credit utilization ratio below 30 percent, but the truth is, it’s really more of a sliding scale,” says Ted Rossman, senior industry analyst at CreditCards.com and Bankrate.com. “FICO says many of the people with the best credit scores keep their credit utilization ratios under 10 percent. That’s generally better than 30 percent, which is better than 50 percent, which is better than 70 percent and so on.”

Lowering your credit utilization ratio is one of Rossman’s top tips for improving your credit score quickly.

“A lot of people don’t realize that it’s typically reported on your statement date. So even if you pay in full (a good practice to avoid interest), you might still have a high credit utilization ratio, which could drag down your credit score. Good fixes could include making an extra mid-month payment to knock the statement balance down before it’s even generated, or potentially asking for a higher credit limit to influence the other side of the ratio.”

What could happen if your utilization rate is 0%?

Though a single-digit credit utilization is ideal, that doesn’t mean you should aim for a 0 percent utilization rate. In fact, it may actually have a negative effect on your credit score because you could appear inactive.

Some cardholders try to achieve a low utilization rate by opening several credit cards but not using the cards to make any transactions. The idea is the cardholder can make all of their purchases on one credit card while those other credit cards report $0 balances. Those unused lines of credit would still contribute to their overall credit limit, bringing down their credit utilization.

However, that plan may not work for long. Some card issuers periodically close accounts that are inactive for too long. This, in turn, would lower your total credit line, thereby increasing your utilization rate.

Avoid credit invisibility

Being credit invisible means you have no credit history recorded with any of the three credit bureaus. The impact on your credit score could be hard to quantify, or you might not have one at all because the bureaus have so little information on you. Ultimately, being credit invisible could make it difficult to get a loan in the short term.

Let’s say you have only one credit card with a $5,000 credit limit. You spend $1,000 on your credit card and then pay off the balance in full before the billing cycle ends. When your billing cycle closes, your statement balance — the amount you owe on the due date at the end of the billing cycle — would be $0.

So, when your credit card issuer reports the card’s current balance, it would be $0, assuming your credit card issuer reports that card’s current balance on your closing date. In this scenario, your credit utilization ratio would be 0 percent. In turn, it appears to the bureaus that you aren’t using your available credit. If this continues, the credit bureaus may consider you inactive, leading to the possibility of becoming credit invisible.

Rather than paying off your balance in full, it may make more sense to carry a small balance into the grace period so that it’s reported to the credit bureaus. From there, you should pay it off before the end of the grace period to avoid paying interest on the balance. This allows you to show responsible credit usage while avoiding interest charges and the pitfalls of a 0 percent utilization ratio.

How to improve your credit utilization ratio

Now that you have an idea of what ratio you should be aiming for, you can start thinking about the strategies you can use to achieve it.

Use the reporting date to your advantage

First, you should contact your card issuer, either through the online portal or the phone number on the back of your credit card, to ask when it reports your balance to the credit bureaus. The tricky part is that each lender has a different date it reports its data, and it could report to each bureau — Experian, Equifax and TransUnion — on a different date. So, at any given moment, your credit score could be different across the three bureaus because of the difference in data they might have on you.

Regardless, as Rossman says, issuers usually report a credit card’s current balance on the statement closing date. This date signifies the end of your billing cycle and the beginning of the grace period before your payment due date.

Remember, a good credit utilization ratio is in the single digits but above zero. To achieve a 7 percent utilization rate on a card with a $1,000 limit, for example, you would leave $70 on your card by your closing date. That $70 would then appear on your credit card statement on your closing date. Therefore, when your current balance is reported (if on your closing date), it’ll be $70, and your credit utilization ratio would be 7 percent.

In other words, to keep your credit utilization ratio low whenever it’s reported, you could pay off most of your current balance every month and have a small statement balance during the grace period or make multiple balance payments throughout the month. Just be sure to pay off the balance before the end of the grace period to avoid paying interest.

Maintain a healthy credit utilization on every card

Be mindful about your total credit utilization and per-card utilization. Even if you keep your total ratio low, a high balance on one of your credit cards could be a red flag to lenders. A high balance on just one credit card may even have a negative effect on your credit score.

“Credit utilization is reported on each of your credit cards individually, as well as across all of your credit cards combined,” Rossman says. “So yes, having a high balance on one card could drag down your score. It’s probably easier to fix, though, than having high utilization across the board.”

Open new credit cards to increase your available credit

Getting a new credit card has the potential to improve your credit score. Every new credit card you receive gives you more available credit, which can lower your overall credit utilization ratio if you don’t immediately turn that new credit into new debt.

However, applying for a credit card triggers a hard inquiry into your credit that can have a negative, albeit temporary, impact on your credit score. Opening new credit lines can help increase your score, since new credit makes up 10 percent of your FICO credit score. However, too many credit applications in a short amount of time indicates to lenders that you may be in financial distress and could lower approval odds.

That’s why it’s best to strategize your credit card applications. If the only reason you’re applying for a new credit card is to improve your credit utilization ratio, a better option might be to request a higher credit limit on one or more of your existing cards. Requesting a higher credit limit can also trigger a hard inquiry with some card issuers, so you should ask first to make sure it won’t.

Think carefully before closing old credit cards

Consider closing a credit card even more cautiously than applying for a new one. Closing a card will reduce your total credit limit, which has the potential to raise your credit utilization ratio. Closing a credit card could also reduce the average age of your accounts. A closed account in good standing stays on your credit report for up to 10 years, but once that closed account falls off your report you might see a reduction in the length of your credit history and a drop in your score. Closing a credit card could impact your credit mix as well if the credit card was your only revolving credit account.

If possible, avoid closing your cards. If you’re thinking about closing a card because you no longer want to pay the annual fee, call the issuer and ask to downgrade the card to a no-annual-fee version instead. That way, you can keep the account open and get the card terms that work better for you. You can also ask your issuer to move your line of credit from the card you want to close to another credit card you hold with the same issuer.

How to minimize credit utilization while maximizing rewards

You may wonder how keeping your credit utilization low can impact your credit card rewards. It’s a valid question, since more spending on a credit card translates into more cash back, points or miles — especially if you’re working to meet a sign-up bonus spending requirement.

The truth is, maintaining a low credit utilization ratio on your rewards card is the best way to get the most out of the card. It’s best to treat your rewards card like a debit card. When you charge a significant amount on your credit card, it may benefit you to pay off most of the balance right away but keep a small amount for the reporting period. This will help you avoid paying interest, and the high balance won’t be reported if you pay it off before your issuer reports balances.

“Rewards aren’t worth it if you carry a balance,” Rossman says. “The average credit card charges an APR of 20.77 percent (according to CreditCards.com as of June 21). It doesn’t make sense to pay that much in interest just to earn 1 percent, 2 percent or even 5 percent in cash back or airline miles. Even carrying a balance for a month or two or three can wipe out all of the value of your rewards (and then some).

“The best way to use a credit card is like a debit card, paying in full to avoid interest, but taking advantage of credit cards’ superior rewards programs and buyer protections.”

Depending on your credit utilization ratio goal, you could also keep a low balance to roll over on your statement. Just be sure to pay off that balance before the payment due date to avoid a missed payment and any interest charges after your grace period.