Credit utilization: what it is and why it matters

Credit utilization compares how much of your credit you’re using with how much you have available. It’s one of the things credit scoring models look at, and it’s a factor you can see and understand directly from your own statements.

What credit utilization means

The CFPB describes your credit utilization ratio as a comparison between how much credit you’re using and your total available credit. In a 2019 blog post, the CFPB explained it as your total credit card balances divided by your total credit limits, figured across all your cards together rather than one card at a time.

Here’s a simple example. Say you have two cards, each with a $1,000 limit, so $2,000 in total available credit. If you owe $300 on one and $200 on the other, you’re using $500 of $2,000. That’s a utilization ratio of 25 percent.

Why it matters to scoring models

The CFPB says credit scoring models look at how close you are to being “maxed out,” because the formulas predict that people who use too much of their available credit may have trouble repaying in the future. Its short advice: don’t get too close to your credit limit.

Utilization is only one factor. Payment history, the length of your credit history and recent applications matter too. For the full picture, see what affects your credit score.

What the CFPB suggests about balances

The CFPB’s advice is to keep your balances low compared with your credit limits. On its page about getting and keeping a good score, it says many experts suggest using less than 30 percent of your total credit limit, and that people with the highest scores often use less than 10 percent.

These are general guidelines from experts, not a rule built into every score. They don’t mean any particular ratio will produce any particular number.

You don’t need to carry a balance

A common belief is that leaving a balance on your card each month helps your score. The CFPB says that’s a myth. You don’t need to carry a balance or have debt to have a good score. Paying your full balance each month keeps your utilization low and means you don’t pay interest on those purchases.

How closing a card can change your ratio

Closing a credit card might seem like a tidy move, but the CFPB warns that it can lower your score rather than raise it. Here’s why. When you close a card, your total available credit goes down. If your balances stay the same, the share of credit you’re using goes up.

Using the example above, if you closed one of those $1,000 cards and moved nothing else, you’d be using $500 of $1,000, or 50 percent.

The CFPB says the effect may be small or temporary and depends on the rest of your credit profile. An older account with a solid payment history may also help support your score, which is another reason to think before closing one.

Closing a card can still make sense. The CFPB lists reasons such as an annual fee or poor terms, or a card that tempts you into debt you can’t repay. If you close a card, the CFPB suggests adjusting your spending or paying down balances to keep your utilization in check.

If you keep an unused card open

The CFPB recommends checking the statements on unused accounts regularly. That helps you spot signs of identity theft and any unexpected fees or charges.

Shared accounts and utilization

Utilization doesn’t only depend on your own spending. A CFPB teaching guide on sharing credit explains that a joint card, a cosigned loan, or adding an authorized user can raise the account holder’s utilization. For example, transferring a balance onto someone else’s card can push up their ratio. If you share credit with anyone, it’s worth keeping an eye on the combined balance.

The short version

• Utilization is your total card balances divided by your total credit limits.
• The CFPB says scoring models look at how close you are to being maxed out.
• The CFPB says many experts suggest staying under 30 percent of your total limit.
• You don’t need to carry a balance. Paying in full each month avoids interest.
• Closing a card lowers your available credit, which can push your ratio up.

Sources

• CFPB: How do I get and keep a good credit score?
• CFPB: Does it hurt my credit to close a credit card?
• CFPB: Credit score myths that might be holding you back from improving your credit
• CFPB: Building credit from scratch
• CFPB: Cosigning loans and sharing credit (teacher guide)

General information, not legal or financial advice. Laws and government guidance change, so check the sources above for the latest.