How Your Credit Utilization Ratio Impacts Your Credit Score     

When lenders and credit card issuers evaluate you as a potential customer, they’re largely interested in your credit score, the number that determines your creditworthiness. And one of the biggest factors that goes into computing your score is your credit utilization ratio, sometimes called your credit card utilization ratio.  

Once you understand how to calculate your credit utilization ratio you can take steps to improve it, which in turn can help boost your credit score. That’s the end goal, since the higher your credit score, the more likely it is you’ll be approved for credit cards and loans – and the more likely you’ll get better terms, too.  

Here are five steps to help you take control of your credit card utilization ratio.

When you apply for a credit card, a loan, and sometimes even when you’re setting up a cell phone plan or an account with a utility, the creditor or business checks your credit score to assess if you’re going to be a good client who pays your bills on time. A credit score is what the financial world turns to most; it’s a three-digit rating that ranges from 300 – very poor – to 850 – excellent credit.  

Your credit utilization ratio is an important factor in calculating your credit score. The ratio represents the fraction of your total available credit limits on all your credit cards – and other revolving debt, if you have any – that you currently use. The smaller the fraction, the better.

If you’re not yet fluent in credit scores, check out “How is a Credit Score Calculated?”

A good way to calculate your credit utilization ratio is to create a two-column worksheet that lists your current balance and maximum credit limit for each credit card. The credit limit appears on your monthly statement. Then:

• Add up all your current balances.
• Add up all your maximum credit limits.
• Divide the total of your outstanding balances by the total of your credit limits.

Here is a quick example:

• Card A has a $1,000 balance and a $5,000 limit.
• Card B has a $500 balance and a $10,000 limit.
• Card C has a $2,000 balance and a $12,000 limit.
• Total balances equal $3,500, and the total credit limit is $27,000.
• Divide $3,500 by $27,000, and, voila, the credit utilization ratio is 13%.

One way to lower your credit utilization ratio is to reduce your total balance, which is the numerator of the fraction credit bureaus use when calculating your credit usage ratio. The numerator is the number above the line of a fraction, and the denominator is the number below the line. The smaller the sum of your balances, the lower your credit usage ratio will be.  

The Debt Avalanche method is an accelerated way to pay down debt.² You would pay the monthly minimum due on every card – on time – and then add more to the payment for the card that charges you the highest interest rate. When the high-rate card balance is wiped out, send the extra money to the card with the next-highest interest rate.

Another way to lower your credit utilization ratio is to increase your total available credit limit, which is the denominator in calculating your usage.  

For instance, if Jane has $3,000 in outstanding balances and her maximum combined credit limit on all her cards is $10,000, she has a utilization ratio of 33% – or $3,000/$10,000. If she’s approved for a $1,500 credit limit increase on one of her cards, her total credit limit rises to $11,500. Assuming she doesn’t increase her spending, the same $3,000 balance means her credit utilization ratio will drop to 26% – $3,000/$11,500.  

Of course, Jane’s strategy should only be considered if you are rock-solid confident that you won’t use the higher credit limit as a license to spend more.  

Another way to increase your total available credit limit is to apply for a new credit card. Again, that only makes sense if you are sure you can afford the new limit and won’t be tempted to overspend. If you go this route, keep in mind that there may be a small temporary decline in your credit score when you open a new credit card account. Opening a new credit card can cause a shift in the age of your credit history, and the hard inquiry used to apply for the new card can also drop your score temporarily, but with responsible use, your score may increase over time.  

You can also prioritize your credit health with American Express MyCredit Guide. With the easy-to-use FICO^® Score Simulator, you can track possible impacts to your FICO^® Score for free before making big financial decisions. (FICO is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.)