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What is Credit Utilization?

Jennifer Goforth Gregory
  • Credit
  • 3 minute read

You likely know how much your current balance is on your credit cards right now. Odds are that you can rattle off any late payments you have made recently. You probably also know what your credit limit is on all of your credit cards. But you may not know one of the most important statistics the credit bureaus use when calculating your credit score: your credit utilization. According to MyFico.com, the credit utilization percentage is used heavily when calculating the Amounts Owed portion of your credit score, which comprises 30 percent of your score.

Amount owed vs. credit limit

The short answer is that credit utilization is the percentage you owe on the card compared with your credit limit. For example, if you have a $10,000 credit limit on your card, but currently owe $3,000 then your credit utilization is 30 percent. Additionally, credit bureaus look at the utilization on a single card and your aggregate utilization percentage, which includes the debt-to-credit-limit ratio of all of your cards combined. This is the reason that you can unknowingly negatively impact your credit utilization percentage by closing accounts with a high limit and low balance.


Keep it low

But what do the credit bureaus consider a good credit utilization percentage? “There are reports all over the web that state 30 percent or 50 percent are the ‘target’ percentages in order to achieve great scores. Those are false reports. In fact, nothing terrific happens at either 30 percent or 50 percent. Thirty percent is certainly better than 50 percent but not as good as 20 percent,” writes John Ulzheimer, president of Consumer Education for SmartCredit.com. “In general, the lower the percentage the more ‘points’ you’re going to earn in the debt category, which is worth 30 percent of the points in your FICO scores. So while 30 percent is not terrible, it shouldn’t be your strategic target. And 50 percent is just an absurd number to shoot for,” Ulzheimer continues. “I’m not sure where those figures came from, but you should not expect great scores carrying that kind of credit card debt.”

So, along with all the other numbers you’ve memorized regarding your credit card account, be sure to add your credit utilization into the fold. It could be a number that pays off most of all!