How Much of Your Credit Limit Should You Use?

Credit utilization is a fundamental aspect of your financial health, representing how much of your available credit you are currently using. This percentage significantly impacts your credit score and is a direct indicator of your credit management habits. Understanding and managing this ratio is important for maintaining a strong financial standing.

Understanding Credit Utilization

Credit utilization is the percentage of your total available credit that you are currently using. To calculate this, you divide your total outstanding credit card balances by your total credit limits across all your revolving accounts. For example, if you have a total of $1,000 in balances across all your credit cards and your combined credit limit is $10,000, your credit utilization is 10%.

This ratio plays a substantial role in credit scoring models like FICO and VantageScore. It is often cited as the second most impactful factor in FICO scores, accounting for about 30% of the overall score. Lenders view a lower utilization rate as a sign of responsible credit management. Conversely, a high utilization rate can suggest a higher risk of default, potentially leading to a lower credit score.

Ideal Credit Utilization Ratios

Experts generally advise keeping your overall credit utilization below 30% of your total available credit. For example, if your combined credit limits are $10,000, your total outstanding balances should not exceed $3,000.

While 30% is a widely accepted benchmark, a lower percentage is more beneficial. Individuals with the highest credit scores often maintain utilization rates in the single digits, sometimes below 10%. No single “magic number” guarantees a perfect score, as credit scoring models consider numerous factors. However, demonstrating a low reliance on available credit is consistently favorable across all models.

Managing Your Credit Utilization

Managing credit utilization involves strategies to keep balances low relative to limits. Consistently paying down credit card balances is effective. Paying off your entire statement balance each month results in a zero utilization rate for that reporting period.

Making multiple payments throughout the month can also significantly impact your reported utilization. Instead of waiting for your statement closing date, paying down balances bi-weekly or even weekly can reduce the amount reported to credit bureaus. For instance, if you charge $1,500 on a card with a $5,000 limit and pay $1,000 before the statement closes, your reported utilization will be based on the remaining $500 balance, or 10%.

Requesting a credit limit increase can also lower your utilization ratio, provided you do not increase your spending. If your limit increases from $5,000 to $10,000 while your balance remains $1,000, your utilization drops from 20% to 10%. Be aware that requesting an increase may result in a “hard inquiry” on your credit report, which can temporarily lower your score by a few points for a short period, typically less than one year.

Avoiding the closure of old, unused credit accounts is another strategy. Closing an account reduces your total available credit, which can increase your overall utilization ratio if you carry balances on other cards. For example, closing a card with a $5,000 limit when you have a $1,000 balance on another card would increase your utilization from 10% (assuming $10,000 total limits) to 20% (assuming $5,000 total limits). Using your credit cards by concentrating spending on one card and paying it off before the statement closes, or spreading small balances across multiple cards, can also help maintain low overall utilization.

Factors Affecting Credit Reporting

The timing of when your credit card issuer reports your balance to credit bureaus significantly impacts your perceived credit utilization. Most credit card companies report your outstanding balance on your statement closing date, not necessarily the date you make a payment. Therefore, paying down your balances before your statement closes is a crucial step to ensure a lower utilization rate is reported. For instance, if your statement closes on the 15th of the month, and you make a large purchase on the 1st, paying it off by the 14th means a zero balance will likely be reported.

It is important to distinguish between different types of credit when considering utilization. While revolving credit, such as credit cards and lines of credit, directly impacts your utilization ratio, installment loans like mortgages or car loans are treated differently. These loans have a fixed payment schedule and their balances are generally not factored into the credit utilization calculation in the same way. For example, a large mortgage balance does not negatively affect your credit utilization ratio.

Lastly, being an authorized user on another person’s credit card can also affect your credit utilization, as that account’s balance and credit limit may appear on your credit report. If the primary cardholder maintains a high utilization on that account, it could negatively impact your own credit score. Conversely, if they manage the account responsibly with low utilization, it could benefit your score.