Credit Utilization: What It Is And Why It Matters

For many consumers, opening a line of credit can seem like an extremely useful option when it comes to managing their finances.

Whether you’re working on building up your credit history, improving your credit score or if you’re in need of extra sources of funding for specific expenses, having a credit card or another type of credit line at your disposal can make achieving your financial goals a lot more manageable. However, it’s important to be aware of the impact your rate of credit utilization can have on your credit score and your ability to get lender approval for future lines of credit.

Let’s take a deeper look at what credit utilization is and why it’s important to keep your usage rate on the lower side.

Simply put, credit utilization is the amount of available money you use from a line of credit over a certain period of time. Your credit utilization ratio is typically presented as a percentage, and that number can fluctuate depending on how much you borrow, how high your credit limit is and how quickly you pay it off.

You can calculate your credit utilization ratio by dividing the total amount of debt you’ve accrued on your line of credit by the amount of credit left available on your line. Say, for instance, you have a credit card with a limit of $500. If you were to use $250 from that line over the course of the month, your credit utilization rate would be 50%.

What Is Considered A "Good" Credit Utilization Ratio?

Experts typically recommend that you keep your credit utilization under 30% of your total credit limit. When you use your line of credit at a higher rate or even go as far as to "max out" your line, it signals to lenders that you might be someone who has difficulty managing your finances or paying off your balances on time, and that could make it more difficult to get approved for future lines of credit.

Utilizing your credit at a high rate can lead lenders to think you’re a risky borrower, and it can also spell bad news for your credit score. If your credit utilization ratio isn’t below 30% when your lender reports updated balance information to the credit bureaus every 30 days or so, it can result in a drop in your FICO or VantageScore credit score.

Fortunately, your score can rebound fairly quickly from this damage once you pay down the balance on your line of credit. It’s important to remember, though, that having an ever-fluctuating credit score due to inconsistent credit utilization habits can have a negative ripple effect on the rest of your finances.

While keeping your credit utilization ratio below 30% might seem tricky, there are several ways to ensure that your credit score remains high and that your reputation with lenders remains favorable. Let’s take a look at how you can keep your spending in check and hold yourself accountable.

Monitor Your Balance Carefully

The first step to making sure that you’re effectively managing your credit utilization is to keep a close eye on the balance for every line of credit you use each month. Tracking your balance throughout the month can not only be a useful way to make sure you aren’t going over 30% usage, but it can also be a way to pinpoint certain spending habits you might have that could be reduced or omitted entirely to ensure a lower credit utilization rate.

Many lenders also give their borrowers the option to set up email or text alerts informing them of their balance status. This can make it even easier to maintain a consistent sense of whether your remaining balance reflects a credit utilization rate above or below 30% than if you were to manually check your balance every week or two.

Set Consistent Payment Dates

Another helpful way to hold yourself accountable and to avoid exceeding your desired level of credit usage is to have set dates one or two times a month when you have to pay off some or all of your outstanding balance. Creating a habit out of paying down your balance on the same day(s) each month can make it much easier to remember your obligations to your lender.

Adopting this habit can also ensure that your balance doesn’t reflect credit usage over 30% when your information is reported to the credit bureaus at the end of your monthly billing cycle.

Increase Your Credit Limit

In some instances, asking your lender to increase the amount you’re able to borrow on your line of credit can actually help lower your credit utilization rate. So long as you’re able to continue to keep your spending in check, having a larger line of credit at your disposal can oftentimes make it easier to keep your utilization under 30%.

If your credit score is a little too low for lenders to be willing to increase your limit, you could also consider asking a family member or close friend with a better credit score and a more established credit history to co-sign on a line of credit with a higher limit with you. This is a major decision to make, as your credit habits would directly impact the co-signer’s credit score – but if you feel confident that you can commit to having good credit utilization practices on a consistent basis, it could be a beneficial option for both you and your co-signer. That said, not all credit issuers allow co-signers, so make sure to do your research when pursuing this option.

Consider Opening New Lines Of Credit

Sometimes the most effective way to keep your credit utilization rate low can be to disperse your expenses across multiple lines of credit. It’s still important to aim for your total credit utilization rate across all of your lines of credit to remain below 30% but depending on what you typically use your lines for, this could potentially be an easier feat with a wider array of credit-borrowing options available to you.

However, opening too many lines of credit too quickly can potentially have a negative impact on your credit score, and having more available lines can be too big of a temptation to overspend for some borrowers. If this is the method you choose to keep your credit utilization rate lower, it can be helpful to have a set purpose in mind for which each line of credit will be used. This could help you distinguish more random frivolous expenditures from necessary ones as you work to remain below a 30% usage rate.

If you borrow a line of credit, it’s important to try to keep your credit utilization ratio below 30%. It won’t be the end of the world if you occasionally exceed that rate, so long as you pay down your outstanding balance shortly thereafter – but to avoid seeing a dip in your credit score, it’s wise to stay on top of your payments and to develop a consistent credit management strategy.

In short: identify a responsible credit utilization range and stick within it.

Have other credit questions? Read more of our Financial Smarts content in the Rocket Loans Learning Center for additional information. And if you’re interested in learning more about other borrowing options, like personal loans, look into applying with Rocket Loans today!