How to Figure Your Credit Utilization Ratio
Written by: Kristy Welsh
Last Updated: September 25, 2017
If you don’t know your credit utilization ratio, it’s time to find out. Fortunately, it’s an easy figure to calculate. It’s simply a matter of doing the math on relevant revolving accounts. It’s also an easy figure to fix if you discover yours is too high.
Do the Math
Your credit utilization ratio is how much you owe compared to how much credit you have available. Here’s how to figure yours.
1) Make a list of your revolving accounts
A revolving account is a credit line that may have a different balance every month, as well as a different minimum monthly payment (depending on what you owe).
So when making your list to figure your credit utilization ratio, include credit cards, department store cards, gas cards, and any other type of retail card. One exception is your home equity line of credit (HELOC). Though technically a revolving account, FICO does not include HELOCs when calculating your credit utilization ratio.
Other things NOT to include in this list are auto loans, student loans, a home equity loan, or charge accounts that require you to pay the balance in full every month (like an American Express charge card).
2) Add up your total credit limit
If you have a $10,000 credit limit one card, a $5,000 credit limit on a second card, and a $5,000 credit limit on a third card, your total credit limit is $20,000.
3) Add up the balances on each of these cards
If you have a balance of $5,000 on the first card, $2,500 on the second card, and $2,500 on the third card, your total balance is $10,000.
4) Divide the balance by the credit limit
If your total balance is $10,000, divide that by your total credit limit of $20,000. In this example, your credit utilization ratio would be 50 percent.
Aim for 30 Percent or Less
As a general rule of thumb, most credit experts recommend that your credit utilization ratio not exceed more than 30 percent. That’s because a big chunk of your FICO score (30 percent) is determined by how much you owe on your credit accounts.
Why does credit utilization ratio matter so much? Because the more available credit you use, the more you may be overextending yourself, and that’s a credit risk.
For example, if you have a $20,000 credit limit, you do not want to have a balance of more than $6,000 at any given time. That’s 30 percent. You might think it doesn’t matter as long as you’re paying your balances in full every month, right? Wrong.
As FICO states on its website:
"Your account balance on your credit report will reflect the account balance your lender reported to the credit bureau (typically the balance from your latest monthly statement)."
"So even if you pay your credit card balances in full each month, your account balance won’t necessarily show on your credit report as $0."
That’s okay. It just further punctuates the importance of trying not to use more than 30 percent of your credit at any one time. But if you do, then make as large a payment as you can right away to bring that ratio down as soon as possible.
More Than Your Credit Score to Think About
Yes, keeping your credit utilization ratio low is good for your credit score. But it’s also good for your bank account. The higher the balances you carry, the greater the possibility that you will get in over your head and start carrying debt from month to month, which means more debt and costly interest fees.