Editorial Policy

How to Understand Your Credit Utilization Score

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By Eva Norlyk Smith, Ph.D.
February 25, 2011

Of all the different components of FICO scores, a consumer’s credit utilization ratio is perhaps the most elusive and least understood.

More than three out of four Americans know that making a payment more than 30 days late will lower your credit score; but only about 59 percent are aware that maxing out credit cards can drag your score down as well, according to a survey by the Consumer Federation of America.

Even fewer realize that, when it comes to your credit utilization ratio, you don’t have to max out your credit card for it to affect your FICO score. According to some experts, using more than 30 percent of the available credit on your credit cards can dent your score.

As a result, it’s important to understand the credit utilization component of FICO scores in full. There are many subtle aspects to credit utilization that impact scores, and not knowing about them could affect your credit. If you already have excellent credit, you may still be able to improve your credit by making small adjustments that will favorably impact your credit utilization ratio.

What is credit utilization?

Credit utilization is a measure of credit card debt in relation to the credit available. It is calculated by dividing your outstanding balance with your credit line. This ratio accounts for 30 percent of your FICO score. Carrying high balances across credit cards or other lines of credit detracts from your credit score because it is viewed as a sign that you are under financial duress and/or you are unable to handle credit responsibly.

The general rule of thumb for credit utilization is to keep your utilization ratio below 30 percent. That means that your credit card debt should not exceed 30 percent of your credit limit. But this is where things get dicey. If you have multiple credit cards, does this mean that you should keep it below 30 percent of the credit limit on each card? Or should you keep it below 30 percent of the credit limit across all cards?

The answer, not surprisingly, is both. The percentage requirement applies to each individual credit card, as well as to your overall level of debt. The FICO scoring model tracks both total utilization across all accounts, as well as utilization within each individual account. FICO also takes into account other revolving credit accounts, such as installment loans, but these tend to be weighted less than credit cards.

Your credit utilization ratio: What not to do

The credit utilization ratio on individual cards is where even credit savvy cardholders often go wrong and inadvertently hurt their credit score. For example, consider a consumer with a total credit line of $30,000 across four credit cards.

At first, the person carries a $2,000 balance on a credit card with a $10,000 limit — well within the utilization recommendations. But then the person runs up $6,000 in charges and transfers the balance to another credit card with a 0 percent balance transfer offer and a credit limit of $10,000.

The total utilization ratio is now at $8,000/$40,000 — still below the ideal 30 percent total credit utilization. However, the utilization on the 0 percent APR card now stands at 60 percent — potentially creating a negative impact on the person’s FICO score.

FICO is mum about the relative contribution of each component, but it is highly likely that having one credit card with a high balance will have as great an impact on your score as having high total credit card debt in relation to the total available credit limit.

As a result, you are better off having small balances spread across several cards, rather than having a large balance on one card. Your credit utilization score is based on a snapshot of your credit utilization each month, so the good news is that your utilization ratio only affects your score for one month. Once you pay down the card balances to a lower utilization ratio, your score will go back up.

Finally, the ideal utilization ratio may be much lower than the 30 percent commonly believed to be acceptable. According to Bankrate.com, recent indications are that although 30 percent is okay, lower is even better. People with the best credit scores have utilization ratios as low as 7 percent.