Key takeaways
- Your credit utilization ratio is the amount of credit you’ve used compared with the amount you have available on your credit cards.
- If your credit utilization ratio exceeds 30%, it can hurt your credit score.
- There are several ways to lower your credit utilization, which can improve your credit score.
When you’re trying to decide how much of your credit you should use, keep in mind that one of the most important factors in your credit score is the amount owed on your credit cards. This factor alone represents 30% of your FICO score.
The amount you owe on a credit card is also referred to as your credit utilization. I know it sounds complex, but it’s easy to explain.
What Is Credit Utilization?
Every credit card has a credit limit. But that doesn’t mean it’s OK to use all the credit you have available. When you use a credit card to make a purchase, it impacts your credit utilization ratio, which is the amount of credit you’ve used compared with the amount you have available. The amount of credit you use on your credit card is important because it also affects your credit score.
How Much of My Credit Card Should I Use?
To obtain a solid credit score, you should keep your credit utilization ratio under 30%. For example, let’s say your credit limit is $1,000 and you have a current balance of $600. This means you have a credit utilization ratio of 60% (600/1,000). When your credit utilization ratio exceeds 30%, your credit score can be damaged.
So if you have a $1,000 credit limit, your balance during the month should be less than $300, which gives you a 30% ratio. Now, keep in mind that the FICO algorithm looks at the ratio across all of your credit cards as well as on each individual card.
Keeping your credit utilization below 30% protects your credit score. But if you want to boost your score as much as you can, keep your ratio under 10%. FICO scores range from 300 to 850, and my score usually fluctuates between 820 and 830. My credit utilization ratio? Less than 7%!
How to Lower Your Credit Utilization
One of the easiest ways to boost your score is to lower your credit utilization on your credit cards. Here are three ways to reduce your ratio:
- Ask for a credit limit increase. This increases your available credit, which can lower your credit utilization. But for this to work, you must vow not to use that newly available credit. Stick to a budget, and track your spending so you aren’t tempted to overindulge and buy things you don’t need.
- Apply for a new credit card. This has the same effect as a higher limit on an existing credit card. Getting a new credit card increases your available credit, and that can lower your ratio. However, do stick to a budget and maintain low utilization ratios on all of your cards.
- Pay down credit card debt. You might not want to hear this, but if you have credit card debt, you need to stop using credit cards for now. This type of debt is toxic and can grow rapidly due to compound interest. As you pay down your debt, your credit utilization ratio will go down, too. Your credit score will also improve, and you’ll be debt-free.
What Is a Good Credit Limit on a Credit Card?
A TransUnion Credit Industry Insights Report for the fourth quarter of 2022 showed that the average credit lines for new credit card accounts was $5,226. But this average includes a wide range of credit scores and credit histories, both of which figure in your credit limit.
The credit limit you get on a new credit card could be much higher than $5,226 or even much lower, especially if you’re new to credit or rebuilding your score. To determine your credit limit, issuers look at your credit report and your credit score to gauge your creditworthiness. But the credit card company also looks at employment history, income and other factors.
Sometimes, the type of credit card influences your limit. For instance, if you apply for a secured credit card, you’ll likely have a low credit limit, depending on the amount of your security deposit. Likewise, if you’re applying for a high-limit credit card and you have a high enough score to get approved for it, your limit could be over $20,000.
If you aren’t happy with the credit limit you receive with a new credit card, call and ask the issuer to consider a higher limit. If you have a high credit score and a stellar payment history, your request might be granted.