How is credit card utilization calculated

Quick insights

• Credit utilization typically refers to the ratio of the credit you’re currently using compared to the total amount of credit available to you. Keeping your credit use low, ideally below 30% of your total credit limit, may be good for your credit score.
• There are a few ways you may be able to improve your credit utilization rate such as paying down your revolving credit account balance(s) on-time and in full each month.
• Credit utilization can play a major role in determining your creditworthiness to loan providers and impact various aspects of your financial life, including loan approvals and interest rates.

There are different factors that can influence your credit score. One of those factors is credit utilization. Credit utilization ratio is just another way of saying how much credit you’re using compared to how much total credit you have available.

What is credit utilization

Credit utilization, or credit use, is a percentage that measures how much revolving credit you’re using compared to the total amount of credit you have available.

What factors go into credit utilization

Credit utilization applies to revolving credit accounts such as credit cards, personal lines of credit and home equity lines of credit. Some installment loans, such as mortgages and student loans, are typically not factored into the calculation. Your credit utilization ratio could increase and decrease over time as you make purchases and payments. Credit utilization is a fluid factor that can fluctuate often.

Credit bureaus are interested in your credit utilization rate because it may reflect a borrower’s ability to manage their debt obligations. Creditors want to assess the risk of lending, which is why this is a factor in your overall credit score.

How to calculate your credit utilization

To calculate your credit utilization ratio, you will need to log into your online credit card accounts and any other revolving accounts or locate your most recent statements.

1. Tally up all your balances
2. Add up the credit limit of each account (This can typically be found online or in your terms and conditions.) This will give you the total available credit.
3. Divide your total balances by the sum of your cards’ credit limits
4. Multiply that number by 100 to see your credit utilization rate as a percentage

Example

As an example, credit card utilization can be determined in the following way. Let’s say you have only one credit card, and that card has an available credit limit of $10,000. If you have a balance of $2,000, your credit utilization is $2,000 divided by $10,000 which is 0.20. Multiple 0.20 by 100 to get 20% as your ratio.

A low percentage could positively impact your credit score as it might demonstrate prudent spending habits and an ability to effectively manage your finances. A credit utilization above 30% might negatively start impacting your score.

There are some ways that might help improve your credit utilization rate:

• Pay down your credit card balances early and in full. Credit card issuers typically report your credit account’s balance to the major credit bureaus at the end of each statement period.
• Ask your credit card issuer for a credit limit increase
• Avoid closing credit card accounts even if you don’t use them often

How can credit utilization affect your credit score and finances

There may be a correlation between your credit utilization, credit score and personal finances. A general rule of thumb is to try to aim for a credit utilization of 30% or lower. Understanding the relationship between overall credit utilization, credit score and credit card utilization can be helpful in assessing your financial health. By keeping this utilization ratio low and making payments on time, you demonstrate responsible credit management habits. This could positively impact your credit score and creditworthiness over time.

How does having multiple credit cards affect your credit utilization

Having multiple credit cards may help provide you with a higher total credit limit. On the flip side, closing a credit card could also have an impact on your credit score since your total available credit may go down. There can be advantages and disadvantages to closing a credit account.

• Advantage #1: Less temptation to go into credit card debt
• Advantage #2: Easier to keep track of fewer credit cards
• Disadvantage #1: Might shorten the length of your credit history if you are closing your oldest account
• Disadvantage #2: Closing a credit account can reduce your total available credit.

Although there may be certain upsides to closing a credit account, in some cases it might be a good idea to keep credit card accounts open to potentially avoid negatively affecting your credit score by decreasing your overall utilization ratio. Bear in mind that some credit card issuers close accounts due to inactivity, so you might need to make a purchase occasionally to keep the account open.

How to track your credit utilization with Credit Journey

Tracking your overall credit may not always be easy. If you’re looking for additional resources, sign up for Chase Credit Journey^® – a free tool for everyone that lets you monitor and view your credit score. Chase Credit Journey^® can make it simple to track your credit score.

• Check your credit score anytime – No Chase account needed
• Receive alerts when changes to your credit report are detected
• Identity monitoring services to help keep your information safe

In conclusion

It's a good idea to pay attention to your credit utilization and credit score. Both metrics can affect your financial opportunities. Having an excellent credit score may help you achieve your financial goals.