Your credit utilization ratio is how much you owe on all your revolving accounts, such as credit cards, compared with your total available credit — expressed as a percentage. It's important because it's one of the biggest factors in your credit score.
Good credit utilization follows the 30% rule
NerdWallet suggests using no more than 30% of your limits, and less is better. People with the best credit scores often have a credit utilization number in the single digits.
What is 100% credit utilization?
Having 100% credit utilization means that you have used all your available credit. Charging too much on your cards, especially if you max them out, is associated with being a higher credit risk. That’s why running up your cards will lower your score.
There are other ways you might accidentally reach that 100% credit utilization mark. Take this example: You have three credit cards. Card No. 1 has $5,000 of available credit, Card No. 2 has $2,000 and Card No. 3 has $3,000. You have maxed out Cards Nos. 1 and 2 and decide to close Card No. 3 since it has a $0 balance and you don’t use it often. Suddenly, your overall credit utilization jumps from 70% to 100%, risking a drop in your credit score and leaving you with no wiggle room for emergencies.
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How to calculate your credit utilization ratio
You can calculate credit utilization yourself using this formula:
Add up the balances on all your credit cards.
Add up the credit limits on all your cards.
Divide the total balance by the total credit limit.
Multiply by 100 to see your credit utilization ratio as a percentage.
For example, say you have two credit cards, both carrying a $500 balance. One card has a $2,000 credit limit and the other a $3,000 credit limit. That works out to a credit card utilization of 20%.
You can also use the credit utilization calculator below to calculate it for you, or sign up with NerdWallet to get a free weekly credit score update that shows your utilization.
Use a credit utilization calculator
There are two types of credit utilization ratios: per-card and overall. Per-card utilization measures how much of each card’s credit limit you’re using, while overall utilization takes all your cards and their limits into account.
Enter the balance and credit limit for up to three cards in this calculator to see your per-card and overall utilization figures:
» MORE: See more financial calculators from NerdWallet
Is per-card or overall utilization more important?
Both per card and overall utilization rates are important. Credit scores can take the ratio into account in both ways.
Why that’s important to know: If you try to counteract the negative effects of a maxed-out credit card by opening a new card and keeping its balance at $0, the high utilization ratio on the maxed-out card still may hurt your score.
If you avoid using more than 30% of the credit limit on any one card, the overall usage takes care of itself.
» MORE FOR CANADIAN READERS: What's a good credit utilization ratio?
How does credit utilization affect my credit score?
Credit utilization is one of the top factors used to calculate your credit score, so it’s important to keep an eye on it. Paying your bills on time and in full can keep the balances on your credit cards low and, ideally, below that 30% threshold.
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Did you know...
You might have heard some people recommend that leaving a small balance on your credit cards each month helps your credit score. This is a myth. It’s best to pay your balance in full every month. Not only will you avoid paying interest but you’ll also keep your credit utilization low, which will help your credit score.
Strategies for keeping your credit utilization low
There are some things you can do to keep your credit utilization low.
Make payments throughout the month to reduce your credit card balance. By paying a portion of your balance each week or every few weeks, it’s likely that your lowest balance will be reported to the credit bureaus. A lower balance means you’re using less of your available credit, which translates to a lower credit utilization score.
Set alerts on your credit cards. Many cards offer alerts you can set for all kinds of things, including when you’ve used a certain portion of your available credit. Set that alert to notify you once you’re close to hitting 30% (or less) to stay on top of spending.
Ask for a higher credit limit. Calling your lender to ask for a higher credit limit can be one way to provide some cushion while you pay down your balances and work toward a 30% or lower credit utilization. But, this works only if you commit to not overspending and using the newly available credit.
