The formula
Revolving means credit cards and lines of credit: accounts with a limit you can borrow against again after paying. Car loans, mortgages and student loans are installment debt and are not in the ratio. The ratio is computed on the balances your card issuers report to the credit bureaus. Experian, one of the bureaus, says lenders typically update their account information once a month, usually at the end of the billing cycle, so the reported figure is often the statement balance, which is why it can be above zero even if you never pay a cent of interest.
myFICO, the consumer arm of the company behind the FICO Score, describes the "amounts owed" category as 30 percent of the score and the utilization ratio as the percentage of your available credit you are using, with a high ratio having a negative effect and a low one a positive effect. The Consumer Financial Protection Bureau (CFPB) puts the practical advice in one line: keep your balances low compared to your total credit limit, and it quotes the expert figure of no more than 30 percent of your total limit.
Three cards, two ratios
| Card | Limit | Balance | Utilization |
|---|---|---|---|
| Card A | $5,000 | $2,400 | 48% |
| Card B | $3,000 | $300 | 10% |
| Card C | $2,000 | $1,500 | 75% |
| All cards | $10,000 | $4,200 | 42% |
The overall ratio is 42%, above the 30 percent line, and Card C is at 75% on its own. Both figures matter: the overall ratio is what the 30 percent advice refers to, and a single card near its limit is the "close to maxed out" situation the CFPB says scoring models look for.
What each move does
The same $1,500 payment, a limit increase, a closed card and a balance transfer, each applied to the starting position above.
| Move | Balances | Limits | Overall utilization |
|---|---|---|---|
| As it is | $4,200 | $10,000 | 42% |
| Pay $1,500 off Card C | $2,700 | $10,000 | 27% |
| Pay $1,500 off Card A instead | $2,700 | $10,000 | 27% |
| Limit on Card A raised to $8,000 | $4,200 | $13,000 | 32% |
| Close Card B (balance paid first) | $3,900 | $7,000 | 56% |
| Move Card C's balance to Card B | $4,200 | $10,000 | 42% |
- Paying down works wherever you pay, for the overall ratio: $1,500 off any card takes it from 42% to 27%. Paying Card C clears the one card that was near its limit, which also fixes the per-card picture, so when the amounts are equal, pay the fullest card. The credit card payoff calculator shows how long each card takes at a given monthly amount, and the debt snowball planner orders several cards by balance or by rate.
- A higher limit lowers the ratio without a payment: raising Card A to $8,000 moves the total to 32%. It only helps if the spending does not rise with it.
- Closing a card raises the ratio even when its balance is zero, because the limit leaves the denominator: 56% after closing Card B. Keeping an old no-fee card open and unused is usually the better move.
- A balance transfer changes nothing overall but can push one card over its limit's worth of utilization; moving Card C's $1,500 onto Card B puts Card B at 60%. The CFPB makes the same point about consolidating balances onto one card.
Timing: statement date versus due date
Experian explains that lenders typically update the bureaus once a month, usually at the end of the billing cycle, so a card you pay in full every month still reports whatever you had spent by then. Its suggestion is to pay as you incur charges rather than waiting for the end of the cycle. If your ratio matters in a given month, for instance before a mortgage application, pay most of the balance down before the statement closes, then pay the remainder by the due date as usual. There is no interest cost to doing this, and no benefit in leaving a balance: the CFPB says you do not need to carry a balance to get a good score, and that paying in full each month can help you get the best scores.
Where it sits among the other factors
| FICO Score category | Share of the score |
|---|---|
| Payment history | 35% |
| Amounts owed (includes utilization) | 30% |
| Length of credit history | 15% |
| New credit | 10% |
| Credit mix | 10% |
Payment history is bigger, but it only changes when a payment is late. Utilization is recomputed every month from whatever the issuers report, which makes it the factor you can move the fastest, in both directions. Keep the ratio in view with a monthly check: add the balances, add the limits, and divide; the percentage calculator does the division, and the budget planner has a place for the card balances so the two totals are never a surprise.
Frequently asked questions
How is credit utilization calculated?
Your revolving balances divided by your revolving credit limits, as a percentage. Three cards with $4,200 owed against $10,000 of limits are 42% utilized. Installment loans such as a car loan or mortgage are not part of it; only cards and lines of credit count.
What utilization should I aim for?
The Consumer Financial Protection Bureau quotes the expert advice to keep your use of credit at no more than 30 percent of your total credit limit, and myFICO says a low ratio has a more positive effect than a high one. Lower is better; there is no bonus for carrying a balance, and the CFPB notes you do not need to carry one to get a good score.
Does paying in full every month keep utilization at zero?
Not necessarily. Experian says lenders typically report once a month, usually at the end of the billing cycle, so a card you pay in full can still show the month's spending as a balance. Its advice is to make payments as you incur charges rather than waiting for the end of the cycle; paying the rest in full by the due date still avoids interest.
Will closing a card improve my ratio?
Usually the opposite. Closing a card removes its limit from the denominator while your balances stay, so the ratio rises. In the example, closing a paid-off $3,000 card lifts utilization from 42% to 56%. The CFPB warns the same way about consolidating balances onto one card.
How much of a credit score is utilization?
myFICO puts "amounts owed" at 30 percent of a FICO Score, second only to payment history at 35 percent. Utilization is a large part of that category, which is why it moves scores faster than almost anything except a missed payment.
Sources
- Consumer Financial Protection Bureau: How do I get and keep a good credit score? ("keep your balances low compared to your total credit limit", the 30 percent figure, no need to carry a balance, the consolidation warning)
- myFICO: What's in your credit score (payment history 35%, amounts owed 30%, length of credit history 15%, new credit 10%, credit mix 10%)
- myFICO: Amount of debt (credit utilization ratio as the percentage of available credit in use; a high ratio can hurt, a low one helps)
- Experian: Why doesn't my credit report show that I always pay in full? (lenders typically report once a month at the end of the billing cycle; pay as you incur charges to keep the reported balance lower)
General information based on the sources above, not tax, legal or financial advice.