Why Does Higher Credit Utilization Decrease Your Credit Score?

A lot of different factors go into calculating your credit score, and they all impact each other. This can make it hard to predict how certain actions will change your scores. 

Some things are fairly concrete, however. For instance, paying bills on time is the most important part of your credit score. Late payments hurt your credit scores (unless they're already very damaged).

Another big piece of that puzzle is your credit utilization, or how much of your available credit you're using. High utilization typically hurts your credit scores, while lower utilization is associated with better credit scores.

If you don’t know how credit utilization works, that’s okay—we’ll clear it up. Let’s look at how utilization impacts your credit scores and how you can improve your utilization rate.

Credit Utilization Shows How Much of Your Credit You Use 

Credit scores are calculated based on a complicated algorithm or equation known as a credit scoring model. Your credit score is a snapshot of your credit history at any given time. The way you pay your bills, how much credit you use, the types of credit you have, and how long you’ve had credit accounts open can all affect your credit score. 

Each factor is weighed differently when it comes to your score. FICO scoring models consider payment history to be worth 35% of your score. Amounts owed, the category that looks at how much debt you have and how much credit you're using, is worth 30% of your FICO credit score. The amounts owed part of your credit history is where higher credit utilization comes into play. 

Credit scoring models consider your overall credit utilization, as well as your utilization for each revolving credit account. (Revolving accounts are ones you can use, repay, then use again, like credit cards and credit lines.) Even if you have a zero balance on multiple credit cards, one card that's maxed out or nearly maxed could still impact your credit scores.

How to Calculate Your Credit Utilization Ratio 

Credit utilization is measured with the credit utilization ratio, or the percentage of available credit that you're using. To calculate your credit utilization ratio, take your credit card balance and divide it by your total credit limit. Then multiply that number by 100 to get the percentage. 

You can calculate your credit utilization for any one credit card, and for all of your credit cards and personal lines of credit together. 

For example: 

Your credit card balance is $4,000 and the credit limit is $10,000.

• Individual utilization is: $4,000 / $10,000 = 0.4 * 100 = 40%

You have three credit cards with total balances that add up to $13,600, and total credit limits that add up to $15,000. 

• Overall utilization is: $13,600 / $15,000 = 0.91 x 100 = 91%

You can also typically find your credit utilization in your issuer's mobile app or online banking dashboard. Most show the percentage of your available credit you're using for each card. Some credit score tracking services may show your overall utilization, as well.

Why High Credit Utilization Hurts Your Credit

Creditors want to lend to borrowers who are likely to pay back the borrowed money, so they watch out for people who might be “risky” borrowers. High-risk borrowers are more likely to default on their debts, meaning they might not pay back what they borrow.

Banks, lenders, and credit scoring models look at high utilization as a sign of risk. Carrying a lot of revolving debt could suggest that you’re borrowing too much money compared to your income, and that you might have trouble paying your debts. 

Part of what makes this harder is that there’s no single magic number that’s guaranteed to give you a “good” credit utilization ratio. Generally, lower is better. According to Experian, as of the third quarter of 2024, people with “poor” credit scores had an average credit utilization ratio of 80.7%, while people with “exceptional” scores had an average credit utilization ratio of 7.1%. 

Higher Credit Utilization Can Lead to Delinquency on Credit Cards 

Research from 2024 from the Federal Reserve shows that people who max out their credit—who have credit utilization rates of 90% to 100%—are much more likely to become delinquent on credit cards. Being delinquent on credit cards means your most recent credit card payment is at least 30 days late. 

Higher credit utilization isn't always a sign of financial distress. Some people need to use more of their credit to get through times of lower-than-usual income or deal with unexpected expenses. And high credit utilization doesn’t automatically mean you'll miss debt payments or become delinquent.

But sometimes, high credit utilization can be a sign of trouble and may feed into other financial problems. If your utilization is getting too high, this could mean you’re having a harder time affording minimum payments. Higher utilization could be happening because you’re short on cash, or because your monthly spending has grown, both of which can cause you to become overdue on debt payments. 

People who become seriously delinquent on credit cards—who have bills more than 60, 90, or 120 days overdue—might have their accounts sent to collections. If you go even longer without paying a delinquent credit card, you could even get sued for credit card debt. 

Debt Relief Could Help You Get Rid of Credit Card Debt

If your credit card balance is already getting close to your maximum credit limit, or if your credit card gets declined because you don’t have any available credit, these could be warning signs that you need financial help.

You have a lot of potential options for dealing with unmanageable debt. When your cards are maxed out and you have no hope of repaying, debt relief could be the answer. Debt settlement might help you get rid of your debt for less than you owe, reducing your utilization quicker than plugging away with minimum payments alone.

Consider a free debt evaluation to talk about your debts and see if you're a good candidate for debt settlement.