Your credit utilization ratio could be tanking your credit score. Here’s what to do about it.

However, you may not be familiar with the term “credit utilization ratio,” which has the second most significant impact on your score (payment history has the most). We’ll define the phrase, explain how it affects your credit score, show you how to calculate it, and share strategies to improve it. That way, you can build and maintain a strong credit profile—and reap the benefits for years to come.

What is a credit utilization ratio?

Your credit utilization ratio is the percentage of your total available credit in use on your revolving credit accounts. Revolving accounts are open-ended, meaning you can spend up to your credit limit and pay down the balance as you go. As you pay the balance down, your available credit replenishes. Examples of revolving accounts include credit cards, personal lines of credit, and home equity lines of credit.

Calculating your credit utilization ratio is a snap. Simply “divide the balance of all your revolving debt by the total amount of revolving credit available to you,” says Deborah Marcella, senior vice president and head of residential and consumer lending at Cambridge Savings Bank.

For example, let’s say you have five credit cards, and your cumulative credit limit is $10,000. If you currently owe $2,000 across all your cards, your credit utilization ratio is 20%. Your credit utilization ratio is always expressed as a percentage.

Why is a credit utilization ratio important?

“Credit utilization is a big factor in [calculating your] credit score,” says Leslie Tayne, principal debt relief attorney and founder of Tayne Law Group. “It [makes up] about 30% of [your] total score. So if you use most of the available credit that you have, you’re going to have a high utilization ratio, and that translates into a lower credit score.”

Tayne says using a high percentage of your available credit raises a red flag to current and potential creditors. A high credit utilization ratio indicates that you might struggle to meet your current financial obligations. Since lenders have to reduce their risk and increase their odds of getting paid, new lenders may decline to give you new credit; existing lenders could even lower the spending limit on your existing accounts. 

A high credit utilization ratio can make it tricky to get approved for any type of credit, including, but not limited to:

Plus, if you do get approved, you may have to pay a higher annual percentage rate (APR) on your debt to compensate the card issuer or lender for the risk of extending you credit.

What is a good credit utilization ratio?

Typically, you should keep your credit utilization ratio as low as possible. Essentially, lenders like to see your accounts the opposite of maxed out. While there are different credit scoring models like the FICO Score and Vantage Score, conventional wisdom suggests keeping your utilization at or below 30%. However, Tayne says there are certain instances where a higher ratio is okay if it’s temporary. 

For example, you should be fine if you use more than 30% of your available credit on a large purchase but pay off the balance the following month. Your credit score may dip a little, but it will bounce back. A high credit utilization ratio becomes problematic when you maintain it for an extended period.

How opening and closing credit cards can impact your credit utilization ratio

In general, closing a credit card lowers your available credit, increasing your credit utilization ratio. On the other hand, opening a new account has the opposite effect. 

Tayne says if your credit cards don’t have balances, closing one or more won’t impact your current credit utilization ratio. However, an account closure could have an effect later if you start to take on debt.

For example, your credit utilization was zero percent if you originally had four credit cards with a combined spending limit of $10,000 and zero-dollar balances. If you decide to close two of them and reduce your spending limit to $5,000, your credit utilization remains at zero percent.

However, if you use your credit card a month later for a $2,500 emergency car repair, your credit utilization ratio instantly jumps to 50%. If you still had the other two cards, your utilization ratio would only be 25%.

Opening and closing credit card accounts can also impact your credit score beyond your credit utilization ratio. For instance, applying for new credit results in a hard inquiry on your credit report, which can slightly reduce your score. On the other hand, closing an older credit account can lower your average credit age, potentially decreasing your score.

How to improve your credit utilization ratio

Is your credit utilization ratio higher than you’d like? Don’t worry. There are plenty of things you can do to improve it, such as:

1. Reduce your balances

Strive to get your account balances below 30%. Pay more than the minimum due each month, and try not to use the card. 

2. Spend with utilization in mind

Keep tabs on your credit limit and balance owed. That way, you can use your card strategically. For example, if you have an upcoming expense, but using your credit card to cover it would cause your utilization ratio to increase to 40%, you might want to use another payment method, if possible.

3. Request a credit limit increase

Ask your credit card issuer(s) for a higher credit limit on your existing account(s). If approved, your utilization ratio will decrease. For example, if you have a cumulative credit limit of $5,000 and owe $1,500, your credit utilization ratio is 30%. However, if you bump up your total credit limit to $6,000, your ratio immediately drops to 25%. (Just don’t rack up a higher balance!)

6. Open a new card

Opening a new credit card account could help lower your credit utilization ratio, providing you use it responsibly. However, Tayne says, “I wouldn’t recommend opening more cards for the purpose of utilization ratio management. I would recommend paying down the cards you have and staying under that 30%.”

7. Avoid closing accounts

Think twice before closing unused credit card accounts. Doing so could increase your credit utilization ratio overnight and shorten your overall account age, another important factor in your overall credit score.

The takeaway 

Your credit utilization ratio is a big deal when it comes to your credit score and overall financial health. You can get (and stay) in the credit utilization ratio “safe zone” by keeping your credit account balances low and paying down your debt. If you’re struggling with the latter, check out these strategies for ditching credit card debt for good.