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Many factors impact your credit score. Credit utilization, or the amount of credit used versus the total credit extended to you, is one of the most important factors impacting a credit score. Especially when you plan to use your credit to apply for a mortgage, credit card or auto loan, it remains critical to understand what credit utilization is and how it can affect your credit score.
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What Is Credit Utilization?
Credit utilization is the ratio of your overall credit balances (the amounts you currently owe to various lenders) to your credit limit (the maximum amount you’ve been approved to borrow). To calculate this rate, take the current amount you owe, divide it by your credit limit and multiply by 100.
Here’s an example: If you owe $500 on a credit card and the credit limit is $1,000, to find your utilization percentage, you’ll need to divide $500 by $1,000. That leaves you with .5. Now, you need to multiply that number by 100, which gives you 50. This means if you carry a $500 balance on a card with a limit of $1,000, your utilization will be 50%.
What Is a Good Credit Utilization Ratio?
Traditional wisdom suggests credit scores benefit most when credit utilization remains below 30%. Those who can keep credit utilization below 10% may see even better results. In general, the lower the ratio, the better. The higher the ratio, the worse the negative impact on your credit score.
How Does Credit Utilization Affect My Credit Score?
Lenders may consider you a high-risk borrower if you use more of your credit and your credit utilization rate can negatively impact your credit score if you allow it to get too high. While this is not, of course, the only factor impacting your credit, credit utilization accounts for up to 30% of your credit score.
How Much of My Credit Card Limit Should I Use?
You should aim to use no more than 30% of your credit limit at any given time. Allowing your credit utilization ratio to rise above this may result in a temporary dip in your score. Fortunately, paying it off quickly should result in your score bouncing back, although you’ll have to wait until your bank reports the new balance to the credit bureaus—depending on the bank, this can take 30 days or more.
Paying down your balance multiple times per month can also help keep your credit score lower despite a higher overall monthly credit utilization. Paying down your balance often doesn’t guarantee your credit utilization won’t rise, but it increases the odds your bank may report your card balance to a credit bureau on a day where your utilization is, in fact, lower.
How Can I Increase My Credit Card Limit?
If you find yourself using most of your credit limit regularly, it may make sense to increase your line of credit instead. Most major credit card providers offer an option to request a credit increase online, which is the easiest option, especially if you have a relatively strong case for increasing your credit—such as a long history of on-time payments. You may also request a credit increase via a phone call to your card issuer.
You can also apply for additional lines of credit or additional cards as a means of increasing your overall credit limit. Do this responsibly—applying for too many cards in too short a period of time may also have a negative impact on your credit score.
If you want to lower your overall available credit, don’t close open accounts. Closing open accounts will reduce the amount of credit you have available to you, and thus increase your credit utilization ratio. Closing older accounts may also impact your credit score in other ways; the age of your oldest active account is a factor in evaluating your credit history and the longer your history is, the better.
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Bottom Line
Your credit utilization rate affects your credit score. Try to keep your overall credit use to about 30% of your overall credit limit, if not lower. Extend your overall credit availability by applying for additional lines of credit, but don’t apply for too many at once.
FAQs
A good rule of thumb is to keep your credit utilization under 30 percent. This means that if you have $10,000 in available credit, you don't ever want your balances to go over $3,000. If your balance exceeds the 30 percent ratio, try to pay it off as soon as possible; otherwise, your credit score may suffer.
What percentage of my credit limit should I use? ›
Most credit experts advise keeping your credit utilization below 30 percent, especially if you want to maintain a good credit score. This means if you have $10,000 in available credit, your outstanding balances should not exceed $3,000.
Is using 50% of the credit limit bad? ›
You should aim to use no more than 30% of your credit limit at any given time. Allowing your credit utilization ratio to rise above this may result in a temporary dip in your score.
What happens if I use 90% of my credit card? ›
Helps keep Credit UtiliSation Ratio Low: If you have one single card and use 90% of the credit limit, it will naturally bring down the credit utilization score.
How much should I use for $1000 credit limit? ›
How much should I spend if my credit limit is $1,000? The Consumer Financial Protection Bureau recommends keeping your credit utilization under 30%. If you have a card with a credit limit of $1,000, try to keep your balance below $300.
What happens if I use 80% of my credit? ›
Spending that approaches or exceeds your credit limit will negatively affect your credit score unless you are able to reduce your balance before the next billing cycle begins.
What happens if I use 40% of my credit? ›
No, it is not okay to use 40% of a credit card because it can negatively affect your credit score. It is recommended that you keep your credit utilization ratio below 30% in order for it to have a positive impact on your credit score and signal to other lenders that you can manage debt responsibly.
Is it OK to use 50% of credit card? ›
A general rule of thumb is to keep your credit utilization ratio below 30%. And if you really want to be an overachiever, aim for 10%.
Is it okay to use 100% of credit limit? ›
While it is permissible to use 100% of your credit card limit, it is not recommended. Maxing out your credit card can adversely impact your credit score, limiting future borrowing options. Moreover, a high outstanding balance incurs substantial interest, putting you at risk of falling into debt.
Is it bad to use 90% of the credit limit? ›
Key takeaways
Your credit utilization ratio is the amount of credit you've used compared with the amount you have available on your credit cards. If your credit utilization ratio exceeds 30%, it can hurt your credit score. There are several ways to lower your credit utilization, which can improve your credit score.
If you're just starting out, a good credit limit for your first card might be around $1,000. If you have built up a solid credit history, a steady income and a good credit score, your credit limit may increase to $5,000 or $10,000 or more — plenty of credit to ensure you can purchase big ticket items.
Is $30000 a high credit limit? ›
Yes, $30,000 is a high credit card limit. Generally, a high credit card limit is considered to be $5,000 or more, and you will likely need good or excellent credit, along with a solid income, to get a limit of $30,000 or higher.
What happens if you go over your credit limit but pay it off? ›
Going over your credit limit usually does not immediately impact your credit, particularly if you pay down your balance to keep the account in good standing. However, an account that remains over its limit for a period of time could be declared delinquent, and the issuer could close the account.
Can I use the 100% limit of my credit card? ›
While it is permissible to use 100% of your credit card limit, it is not recommended. Maxing out your credit card can adversely impact your credit score, limiting future borrowing options. Moreover, a high outstanding balance incurs substantial interest, putting you at risk of falling into debt.
How much of a $2500 credit limit should I use? ›
You should use less than 30% of a $2,500 credit card limit each month in order to avoid damage to your credit score. Having a balance of $750 or less when your monthly statement closes will show that you are responsible about keeping your credit utilization low.
What is the best credit limit utilization percentage? ›
In general, it is advised to keep the utilisation under 30% of the overall credit limit.
How much should I use at the $2000 credit limit? ›
What is a good credit utilization ratio? The Consumer Financial Protection Bureau (CFPB) recommends keeping your credit utilization ratio below 30%. So, if your only line of credit is a credit card with a $2,000 limit, that would mean keeping your balance below $600.
