Credit Utilization Ratio Explained

Turbo Takeaways

• Credit utilization is a rate used by lenders and credit reporting bureaus to determine how well you handle certain revolving debts.
• Your credit utilization ratio is an important factor used to calculate your credit score.
• You can improve your credit utilization ratio by paying off debt and extending your available credit.

A credit utilization ratio is a significant figure that lenders and credit reporting bureaus use to determine a consumer’s ability to manage and pay off debt. Also referred to as a credit utilization rate, this calculation is an integral part of your credit score.

Rates fluctuate depending on when you pay your balance and when your credit utilization is measured within your billing cycle. However, it’s important to keep your ratio low to maintain excellent credit.

Keep reading to learn more about how credit utilization ratios affect your credit score and how you can improve your rates by taking proactive steps with your finances.

What Is a Credit Utilization Ratio?

A credit utilization ratio is a percentage that shows the amount of credit you’re using based on how much you have available. Credit utilization rates are based on revolving lines of credit, which for most consumers means credit cards. Revolving credit can also include personal lines of credit offered through a bank or a home equity line of credit (HELOC) based on the value of your house.

Credit utilization ratios are used to determine a sizeable part of your credit score. Your utilization rate shows lenders how you handle debt and how likely you are to pay off debt in the future. Keeping your rate low ensures you’re more likely to attract lenders and maintain a strong credit score.

How To Calculate a Credit Utilization Ratio

Your credit utilization ratio is calculated by looking at your total amount of available credit (your credit limit) and the current balance on each of your revolving credit accounts. Once you know the total of your credit limits and balances, you’ll divide the outstanding debt by your available credit.

Here’s a sample calculation to determine a credit utilization ratio:

What Is a Good Credit Utilization Rate?

When it comes to credit utilization, the lower your ratio, the better. Experts suggest that a credit utilization rate of 30% or less is best, while a score in the single digits is ideal to secure excellent credit.

Lower ratios can also prove that you’re able to pay off debt and are less of a risk for lenders. Using credit within your limits and quickly and consistently paying off balances are some key strategies to maintaining an effective credit utilization ratio.

Recent statistics show an average credit utilization rate hovering just below 30% across the country. This proves that many American consumers maintain a reasonable credit utilization ratio that contributes to an effective credit score.

How Does a Credit Utilization Ratio Affect Your Credit Score?

Your credit utilization ratio is one of the biggest contributors to your overall credit score, second only to payment history with some reporting bureaus. Since your credit utilization weighs so heavily on your credit score, a high ratio could drag your score down, making it a challenge to open new lines of credit or secure a loan at a decent interest rate.

However, credit reporting bureaus calculate utilization rates based on your most recent balance history versus your available credit. Even if you’ve struggled with large balances in the past, your current balance versus your credit limits is what’s used to determine your score. That’s why it’s important to be proactive in paying off debt and keeping balances low.

As soon as you start reducing your account balances, your credit utilization ratio drops, making it one of the quickest ways to improve your credit score.

5 Strategies To Improve Your Credit Utilization Ratio

Here are some key ways to keep your credit utilization rate low:

1. Pay off balances as fast as possible

The faster you pay off balances, the quicker you’ll improve your utilization rate. Since reporting agencies may send data several times during a credit cycle (usually about a month), your utilization ratio can be updated quickly on your credit report.

Using a debt relief program is one effective approach to consistently pay off debts with expert guidance. Some options even help you pay off debt for less than what you owe, often at a faster pace than simply consolidating debt.

2. Ask to expand your credit limit

Raising your credit limit on one or multiple accounts may also improve your utilization rate. With more available credit versus your balances, your ratio drops. However, this option can tempt you to overspend with a new higher limit.

If you do ask to raise your credit limit, plan to operate under the original limit when you make purchases through the account. That way, you’ll have the extended credit available, keep your utilization low, and avoid spending too much.

3. Open a new credit card

If you only have one or two credit cards, opening another can increase your available credit and improve your utilization rate. As long as you pay off the balance on each card, you may even reap extra benefits like cash back or travel points while improving your utilization rate.

4. Pay off balances during the billing period

Because your utilization rate can fluctuate based on when it’s checked during the credit cycle, paying off your balance as soon as you charge something and before the due date can quickly boost your ratio. A pay-as-you-go approach can also make you more aware of your spending and help you budget, leading to better financial choices.

5. Avoid closing credit card accounts

Even if you don’t use a card often, keeping the account open raises your available credit without increasing your balance. This is key to keeping your credit utilization low and maintaining an effective rate.

Reduce Your Financial Burdens with TurboDebt

If you’re struggling with credit card debt or other large balances, you may face a higher credit utilization ratio. The best way to lower your rate is to reduce and pay off debt as fast as possible.

At TurboDebt®, it’s our mission to help consumers overcome financial struggles by connecting clients with the best options for debt relief. We’ve already enrolled millions of dollars in debt into our program, helping thousands of American consumers reduce their total debt and pay off balances faster. Over 20,000 positive reviews across Trustpilot and Google prove we’re a trusted partner for eliminating unsecured debts.

All it takes is a few minutes to start a free consultation with one of our expert team members. Contact TurboDebt today to begin your debt relief journey!