You’ve probably heard that you need to pay your bills on time to have good credit, but there is a hidden factor that makes up 30% of your FICO score: your credit utilization ratio.
What is Credit Utilization?
Credit utilization is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. It’s usually expressed as a percentage.
For example, if you have a credit card with a ,000 limit and your balance is , your credit utilization ratio is 30%.
Why Does It Matter?
Lenders look at your utilization ratio to gauge how much you rely on credit. If your cards are maxed out, it signals financial distress, making you a higher risk. That’s why high utilization tanks your credit score, even if you make all your minimum payments on time.
The Golden Rule: Keep It Under 30%
The general rule of thumb is to keep your total credit utilization under 30%. However, if you want to achieve an exceptional credit score (like anything above 800), you should aim to keep it under 10%.
How to Lower Your Utilization Ratio
- Pay your balance multiple times a month: Credit card companies report balances to the bureaus once a month (usually on the statement closing date). If you pay your balance down before that date, a lower balance gets reported.
- Request a credit limit increase: If your limit goes from ,000 to ,000, but your spending stays the same, your utilization automatically drops by half. Just don’t use the higher limit as an excuse to spend more!
- Keep old cards open: Even if you don’t use an old card, keep it open. Closing it reduces your total available credit, which instantly spikes your utilization ratio on your remaining cards.