How to Lower Credit Utilization

You’ve got big plans, and your debt doesn’t have to stand in the way of them. But when it comes to credit cards, it’s not just about how much you owe—it’s also about how much you could borrow if you wanted to. 

In lender-speak, this is known as your credit utilization ratio, and it’s a measure of how much of your available credit limit you’re using. Let’s say you owe $500 and your credit limit is $1,000. Then you’re using 50% of your available credit. 

We’ll help you learn how to lower credit utilization ratios so you can take charge of your financial health. 

What Is Credit Utilization?

Credit utilization is a number that measures how much or how little of your available credit you’re actually using. It sounds very technical, but it’s actually a simple idea that you already use in other situations. For example, you might say your car’s gas tank is a quarter full (i.e., 25%).

Credit utilization applies to revolving debt like credit cards and personal lines of credit, not to installment debts like personal loans or mortgages. You can measure your credit utilization in a couple of different ways:

• Individual credit utilization. The percentage of available credit you’re using on a single account.

• Total credit utilization. The percentage of available credit you’re using across all accounts combined.

Both types are key for building strong credit, along with other factors like making on-time payments.

Why Credit Utilization Matters

Credit utilization is important because it makes up a big part of your credit score. In fact, it’s one of the most critical credit scoring factors. The only factor with more weight is your payment history. Also, it’s a lot easier to change your credit utilization ratio than something like your payment history. That makes it especially helpful if you’re looking for quick ways to help grow your credit. 

Credit scoring companies like FICO put such a high emphasis on your credit utilization because it’s a good way to figure out how well you can manage your debt. It can also help them gauge your overall financial health, because people are more likely to carry higher credit card balances when they’re running into money problems. 

A high credit utilization means you’re close to maxing out your credit card debt. You might be relying more on your credit card to pay for basic living expenses, and the higher your balance gets, the harder it can be to pay down again. 

In comparison, a low credit utilization could mean you’re better equipped to handle everyday expenses. You’re less likely to default on the credit card, because payments are low and easy to manage. You may have more financial flexibility because you have more of your credit limit available to use if you do run into an emergency. 

How to Calculate Your Credit Utilization Ratio

Your credit utilization ratio is very easy to calculate. Here’s the formula:

(credit card balance) / (credit card limit) * 100 = credit utilization ratio

Let’s break it down into simple steps:

1. Add up your credit card balances. Look for this number on your credit card statement or in your online account. Example: Bob Loblaw has two credit cards: one with a $500 balance and one with a $300 balance. In total, Bob owes $800. 

2. Add up your credit card limits. You can usually find this number listed somewhere near your balances. Example: The credit card limits on Bob’s cards are $1,500 and $1,000, so his total credit limit is $2,500. 

3. Divide your total credit card balance by your total credit limit. This gives you a clearer picture of how close you’re getting to maxing out your cards. Example: Bob divides his credit card balance ($800) by his credit limit ($2,500) to get 0.32. 

4. Multiply by 100. This turns the fraction into a percentage, which is easier to understand. Example: Bob multiples 0.32 by 100, which equals 32%—in other words, he’s using 32% of his available credit limit. 

Ways to Lower Your Credit Utilization

Often, building good credit is a slow, multi-year process—but that’s not always the case. One of the really exciting things about learning how to lower your credit utilization is how quickly it can help. Depending on when your lender reports your updated credit information to the credit bureaus and when you make your moves, you may be able to notice an almost immediate change in some cases.

Remember, too, everyone’s situation is different. Some strategies might help you more than others. And, you can always mix-and-match different approaches, too:

Pay down credit card balances

The best way to lower your credit utilization is to pay down your credit card balances, since that directly reduces the amount that you owe. That’s easier said than done, so here are a few strategies that can help:

• Use windfalls like tax refunds or work bonuses to pay more.

• Try to send in a small amount extra with each credit card payment.

• Create a budget to help you cut expenses, leaving more to pay off debt.

• Use the debt snowball or debt avalanche strategy to focus on one card at a time.

• Try to pay off all new credit card charges in full each month, or avoid using it entirely until it's paid off.

Keep in mind that credit card companies only report your debt once per month, so your credit score isn’t always a snapshot of your current situation. It can take up to a month for your debt paydown strategies to reflect on your credit report. 

Make multiple payments each month

You’re not limited to making one credit card payment per month. You could actually make as many payments as you want. And there are lots of good reasons to make multiple payments throughout the month:

• It keeps your balance from creeping up too much.

• It removes the temptation to spend extra cash on something else.

• It’s easier to stay on top of new charges you make throughout the month.

• It keeps your credit card balance  top of mind, so it’s easier to remember.

Request a credit limit increase or apply for a new card

Remember, credit utilization is a two-part equation: your credit balance and your credit limit. It’s wise to focus on the balance side of the equation, but you could improve your credit utilization by increasing your credit limit, too. 

You can do this in two ways: 

• Asking your current lenders to bump up your credit limit. 

• Opening a new credit card. You may notice a small dip in your credit score when you apply, as your lender will check your credit, but this is only temporary. 

An important caveat here, though: sometimes, people are tempted to use their new credit limit by spending even more. This strategy only helps you if you don’t use that newly available credit. If you do, you’ll end up right back where you started, but this time in more debt. 

Consider debt consolidation

Debt consolidation means moving your credit card balances to a new loan that you take out, just for this specific purpose. It’s a form of credit card debt relief that transforms your revolving debt into installment debt, which isn’t included in credit utilization calculations. You may be able to lower your credit utilization very quickly, in just the time it takes for these money moves to show up on your credit report. 

Many types of loans are used to consolidate your debt, such as a home equity loan or a personal loan. (In fact, some loans are called debt consolidation loans, but these are actually just rebranded personal loans.) It’s best if you’re able to get approved for a loan with a lower rate, too, since then more of your payment will go toward paying down the debt instead of into the lender’s pocket.

Another thing to watch out for: Like the previous strategy, this only works if you can keep your credit card balances low afterward. If you run up a balance on your credit card again, you’ll be in the same spot as before, but with even more debt. 

Use multiple cards strategically

Your total credit utilization—across all cards—matters, but so does your credit utilization for each individual card. So it’s wise to think about how you use each card in relation to your other ones.

Let’s say you have three credit cards, but you only really use one of them. You could have a great credit utilization rate overall, but if that one solo card is maxed out, it could still be hurting your credit score. 

Instead, it’s better to keep your balances low across each of your cards, if you can. 

Keep old credit cards open

If you have old credit cards you’re no longer using, think twice before you close them, especially if you’re not paying an annual fee for them. Each time you close a credit card, your overall credit limit drops—and that raises your overall credit utilization ratio. 

Calculating your credit utilization ratio is easy. Let’s say you have two credit cards: 

Calculate your credit utilization ratio by adding up all your credit card balances. Then, add up your credit limits. Divide your total balances by your total credit limits: 

Step 1: 500 + 0 = 500

Step 2: 500 / 2,000 = .25

Multiply the result by 100 to get your credit utilization ratio: 25%. 

If you close the card you’re not using, your credit utilization shoots up to 50%:

500 / 1,000 = .50

.50 x 100 = 50%

This would likely cause a drop in your credit score.

It’s also good to keep old credit cards open because it lengthens your credit history. Length of credit history is another major factor in your credit score, and one of the harder ones to change without simply waiting a long time for your accounts to get older. 

What’s a Good Credit Utilization Ratio?

Many people claim that a 10% or a 30% credit utilization ratio is best, but this is a credit myth.  

The truth is, there aren’t any universal cutoff points. Rather, it’s best to keep your credit card balances as low as you can while still using the card. 

Another credit utilization myth: you should always keep a small balance on your credit card. This isn’t true and could end up costing you more over time. 

Even FICO recommends paying off the credit card balance in full each month, if you can, and here’s why: there’s always a delay between when you get your monthly statement, and when your payment is due. Your statement balance is used to calculate your credit utilization, not necessarily what you currently owe. In fact, you usually have a three-week grace period before your payment due date.

If you pay off your credit card in full before then, you won’t owe any interest at all. Paying it off in full doesn’t change what’s on your credit report. You’ll get all of the credit-building power of using your credit card, but without having to pay extra financing costs. It could take some time to get to this point, though, so don’t worry. As long as your credit card balance goes down over time, you’re moving in the right direction. 

When Professional Help Makes Sense

Many people are able to take charge of their credit card payoff through DIY methods. But many people also find better success through debt relief programs that offer additional support, especially if you’re overwhelmed or unsure where to start. 

If you have a very high credit utilization ratio and you’re struggling to make your payments, it might be worth considering debt settlement as an alternative. These programs can’t guarantee success, but they’re often very helpful in lowering the overall amount of debt you have to repay. Learn more about how Freedom Debt Relief works to find out if it might be right for you.