Your credit utilization ratio (or credit utilization rate) is the percentage of your total revolving credit you’re using. This number accounts for all types of revolving debt, including credit cards, home equity lines of credit (HELOCs) and personal lines of credit.
Your credit utilization ratio is an important factor in determining your creditworthiness and helps lenders evaluate credit and loan applications. Let’s learn more.
What impacts your credit utilization?
Your credit utilization ratio is impacted by debt in your revolving credit accounts. The most common example of revolving credit accounts is credit cards. Other revolving credit lines, like home equity lines of credit (HELOCs) and personal lines of credit, can contribute to your credit utilization.
Non-revolving debt, such as personal loans, auto loans and mortgages don’t factor into your credit utilization. They do impact your debt-to-income ratio (DTI), another factor lenders may consider when you apply for credit.
Calculating credit utilization ratio
To calculate your credit utilization:
- Review your credit card statements and other revolving credit account statements and add up your total outstanding debt.
- Tally the total amount of credit available to you or your credit limits.
- Divide total debt by total credit available and multiply that number by 100. The result is your credit utilization ratio.
Here’s an example – let’s say you have one credit card with a limit of $1,500 and a balance of $500 and a second credit card with a limit of $3,500 and a balance of $1800. Your total available credit is $5,000 and your outstanding debt is $2,300. $2,300 / 5000 = .46, so your credit utilization ratio is 46%.
What credit utilization ratio do lenders look for?
Lenders often consider your credit utilization when deciding whether to approve you for a loan or line of credit. As a general rule, lenders prefer a credit utilization rate below 30%. A lower utilization ratio signals that you’re not overwhelmed by debt.
Improving credit utilization ratio
Here are a few ways to help lower your credit utilization ratio:
Pay down credit card balances: This is the most straightforward way to lower your credit utilization – decreasing credit card debt means you’re using less of your available credit.
Raise your credit card limits: Because available credit is part of your credit utilization ratio, you can help improve your ratio by increasing your credit card limits. Try requesting an increase with your card issuer. Reliable customers who make payments on time are more likely to receive an increase in their credit limit.
Open new lines of credit: Like asking for an increased limit, getting a new credit card is another way to raise your total available credit. If you’re looking to lower your debt, it can help to come up with a plan and consider strategies like leveraging a balance transfer card with a low intro APR offer.
Consider consolidating debt: Consolidating credit card debt with a personal loan can help reduce your credit utilization because a personal loan is not a revolving line of credit and, therefore, is not included in your credit utilization ratio. Consolidating debt can also allow you to roll credit card debts into a single monthly payment at a fixed interest rate.
Keep old credit cards open: You may be tempted to close an older credit card you’re not using anymore. Because credit utilization ratio depends on available credit, there is a benefit to keeping existing credit cards open.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
