Definition
Credit utilization is the ratio of your current credit card balances to your total credit limits, expressed as a percentage. It is one of the most significant factors in your credit score — typically accounting for about 30% of a FICO score. A lower utilization rate signals to lenders that you manage credit responsibly. Keeping utilization below 30% is generally recommended; below 10% is ideal.
Example
You have two credit cards: one with a $4,000 limit and a $1,200 balance, and another with a $6,000 limit and an $800 balance. Your total utilization is ($1,200 + $800) / ($4,000 + $6,000) = $2,000 / $10,000 = 20%. To bring it below 10%, you would need to reduce your total balance to under $1,000.
How It's Calculated
Credit Utilization = (Total Balances ÷ Total Credit Limits) × 100. Both per-card utilization and overall utilization affect your score. Paying down high-balance cards before the statement closing date ensures the lower balance is reported to credit bureaus.
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