
What Is A Credit Utilization Ratio And Why Does It Matter?
Dan Rafter4-minute read
May 07, 2021
Disclosure: This post contains affiliate links, which means we receive a commission if you click a link and purchase something that we have recommended. Please check out our disclosure policy for more details.
You know that lenders look carefully at your three-digit FICO® Score when determining whether to approve you for a mortgage, student, auto or personal loan. You know, too, that with a higher credit score you’ll qualify for the best credit cards at the lowest interest rates.
What Is Your Credit Utilization Ratio?
As the name suggests, your credit utilization ratio measures how much of your available credit you’re using. And when it comes to your credit score, it’s best for your credit utilization ratio to be as low as possible.
Calculating your credit utilization ratio is simple. First, add up all the balances on your credit cards. Then add up the credit limits on all your cards. Divide your total balance by your total credit limit. Then multiply that number by 100 to see your credit utilization ratio as a percentage.
Why Does Your Credit Utilization Ratio Matter?
Your credit utilization ratio is one of the five key factors that myFICO says makes up your much-used FICO® Score. According to myFICO, your credit utilization ratio accounts for 30% of your score. That's second only to your payment history, which makes up 35% of your FICO® Score.
What’s A Good Credit Utilization Ratio?
You might’ve heard that you should keep your credit utilization ratio at 30% or lower, meaning that you’re using 30% or less of your available credit. Some financial experts will recommend this. Others say that an even lower ratio, like 20%, is a better figure.
Having less credit card debt and a lower credit utilization ratio can help you earn a lower debt-to-income ratio, something that’ll boost your odds of qualifying for a mortgage.
"Credit utilization is incredibly important," Sensiba said. "It is the number-two factor when calculating your credit score."
How To Improve Your Credit Utilization Ratio
Boosting this ratio isn’t complicated. You’ll improve your credit utilization ratio by paying down your credit card debt. The more debt you eliminate, the lower your ratio will be.
One other tip: If you do pay off the entire balance on a credit card, don’t close that account. Doing so will immediately increase your credit utilization ratio even if you don’t make a single new charge. That’s because your available credit is reduced.
Say you have $2,000 of credit card debt and $10,000 of available credit. If you close a card with a credit limit of $3,000, you now have $2,000 of credit card debt and available credit of just $7,000. That’ll increase your credit utilization ratio.
Rocket HQSM has partnered with CardRatings for our coverage of credit card products. Rocket HQ and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.
Apply For A Mortgage Online
Dan Rafter
Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.
Related Resources
Viewing 1 - 3 of 3