Credit utilization

Credit utilization is a ratio of two numbers on your credit report, the balance each card issuer last reported and the limit it reported alongside it. It is read across all your cards together and on each card alone, and both readings count. The balance the bureaus see is usually the statement balance, so paying in full by the due date does not make utilization zero; paying before the statement closes is what lowers it. Of everything a credit score is computed from, utilization is the figure that changes fastest, in either direction, because most models read it fresh from each month's reported balances.

In a sentence

• "Her credit utilization is 24%, $2,400 owed across $10,000 of limits, and the guideline is to stay under 30%."
• "Paying before the statement closes lowers the credit utilization the bureaus see; paying in full by the due date avoids interest, and the two are different dates."
• "Closing the unused card pushed his credit utilization from 24% to 30% without a dollar of new spending."

How it's calculated

Credit utilization = reported card balances ÷ reported card limits

1. Each card issuer reports the card's balance and limit to the bureaus about once a month, usually the statement balance on the closing date.
2. The overall ratio adds every card's reported balance and divides by every card's limit. A card with a $0 balance still contributes its limit to the bottom of the fraction.
3. Each card's own ratio is read too. One card near its limit stands out even when the overall figure is low.
4. Only revolving accounts count, credit cards and other lines of credit. A car loan or a mortgage is an installment loan and is not part of the ratio.

Below 30% is the common guideline, and lower is better. The ratio has little memory in most models: it is read from the balances on the report now, and a high month stops counting once a lower balance replaces it.

An example

Three cards on one report.

The overall figure is inside the guideline; Card A on its own is not. Three moves change it, and only one of them involves paying anything.

The first move also brings Card A alone down to 18%, $900 of $5,000. The limit raise lowers the ratio only for as long as spending stays where it was. Closing Card C removes $2,000 from the bottom of the fraction and nothing from the top, which is how a tidy-up with no new spending takes the figure to the edge of the guideline.

Why it matters

Utilization is the second-heaviest factor in a credit score and the only heavy one you can move within a month. Payment history takes years to build and a late payment stays on the report for years; utilization is reported again every cycle, so a balance paid down before the closing date is a lower ratio in the next score. That makes it the lever to pull in the weeks before a mortgage or car loan application, and the reason a large purchase put on a card and paid in full can still lower a score for a month if the statement closes first. The mistake it prevents is closing an old, unused card to be tidy: the limit leaves the fraction, the other cards' balances stay, and the ratio rises.

Credit utilization versus debt-to-income ratio

Credit utilization compares card balances with card limits; a debt-to-income ratio compares monthly debt payments with gross monthly income. Utilization is read from the credit report and feeds the score; the debt-to-income ratio is computed by a lender from your pay stubs and the payments on the report, and the score does not include it. A household can have low utilization and a high debt-to-income ratio, a large mortgage and a car payment beside cards paid in full, or the reverse, a small income with no loans and one card near its limit. Lenders look at both, one for how you have handled credit and the other for how much payment your income can carry. See Debt-to-income ratio.

Common questions

Is credit utilization the same as a debt-to-income ratio? No. Utilization is balances over limits, on cards only, read from the credit report. A debt-to-income ratio is monthly payments over gross monthly income, on every debt, computed by a lender. Paying a card down before its statement closes lowers the first and barely touches the second.

What is a good credit utilization? Below 30% is the common guideline, overall and on each card, and lower is better. It does not need to be zero: a small reported balance on a card that is paid in full every month does no harm, and 0% on every card is not required for a strong score.

Does paying my card in full every month give me 0% utilization? Usually not. Most issuers report the statement balance, and the statement closes before the payment is due, so the balance the bureaus see is the one on the statement, whether or not it is paid in full afterward. To report a lower figure, pay part of the balance before the closing date.

Does closing a credit card lower my utilization? It raises it. The closed card's limit leaves the bottom of the fraction while the balances on the other cards stay, so the same balances are a larger share of a smaller total. Keeping an old card open with a small charge on it now and then holds both the limit and the account's age.

Do loans count in credit utilization? No. The ratio is revolving credit only, cards and lines of credit. Installment loans, a car loan or a mortgage, count elsewhere in the score, as how much of the original amount is still owed, but they are not in this figure.

Go deeper

• How to budget with a credit card without overspending budgets each purchase on the day it happens and pays the statement in full, which keeps the reported balance small without a separate routine.
• The Credit card payoff calculator shows how long a credit card balance takes to clear at the payment you make now, what the interest costs, and what to pay each month to be done by a date you choose.
• The Debt payoff calculator lists your cards and loans and compares the avalanche and snowball methods, when you are debt-free under each, what the interest costs, and the order the debts fall.