How Does Credit Utilization Affect My Credit Score?

Whether you’re starting out on your financial journey or trying to rebuild your credit, maintaining a healthy credit card utilization is essential. Unfortunately, many people are unaware of credit utilization and its role in determining a credit score. 

Credit card utilization — or simply credit utilization — refers to how effectively you use (or utilize) your credit. This concept is expressed in terms of your credit utilization ratio, which is the amount of debt you have compared to the amount of credit available.

Read on to learn how credit utilization affects your credit score, and how to lower your credit utilization.

How credit utilization affects your credit score

Credit utilization accounts for 30% of your credit score. The higher your credit utilization ratio (or, the more debt you have compared to your available credit), the more negative the impact on your credit score.

To lower your credit utilization, keep your debts as low as possible, and don’t max out your credit cards. Keeping the percentage of the total credit you use below 30% is best. For example, suppose you have a credit card with a $1,000 limit. You would want to avoid charging over $300 to maintain a credit utilization ratio below 30%.

How long does credit utilization affect my credit score?

A high credit utilization ratio will affect your credit score until you repay enough debt to lower it. Then, wait for your credit report to be updated. On average, credit reports update every 30 to 45 days.

How much does lowering credit utilization affect my credit score?

Since credit utilization accounts for 30% of your credit score, lowering your ratio can have quite an impact. It’s important to note, however, that even if your total credit utilization ratio is low but you have a high balance on a single credit card, your credit score may still be negatively affected.

How to lower your credit card utilization

Pay off debt balances

The most straightforward way to improve your credit utilization ratio is to pay off your credit card and loan balances.

Paying down multiple balances can take some planning. For instance, you might put any cash windfall, such as an income tax return, toward your credit card with the highest interest rate. Another option is to pay off your smallest balance – a strategy called the debt snowball method.

Ask for a credit limit increase

Requesting a credit limit increase can boost the amount of credit you have available and lower your credit utilization. Depending on your creditor, you can make the request online through the company’s website, app, or user account portal. If not, call the company’s customer service number.

Get a balance transfer credit card

A balance transfer card is a credit card account used to consolidate multiple credit card balances, and it can also lower your credit utilization. Balance transfer cards tend to have low introductory interest rates for a set period, which can help you pay down the debt faster. Just be sure to avoid racking up additional debt on the cards you pay off.

Pay your credit cards more often

Making extra payments can help decrease your credit card balance and improve your credit utilization in less time. In fact, even making a single additional monthly payment can save you money on interest and finance charges.

Should I open more credit cards to improve my credit utilization?

While having more available credit helps improve your credit utilization, opening additional credit card accounts may lower your score in the short term. 

When you apply for a new credit card, the lender checks your credit report to assess your creditworthiness. This is known as a hard inquiry or hard pull, and it can hurt your credit score. Each hard inquiry can lower your score by a few points, but multiple hard inquiries can have a significant impact.

Additionally, you might be tempted to use the new credit cards more than intended, plunging you deeper into debt.

>RELATED: Soft vs. Hard Credit Checks

Will closing credit cards affect my credit utilization?

Yes, closing credit accounts reduces your available credit, which negatively affects your credit utilization ratio. But, more than that, closing an older account reduces the age of your credit history.

A better option is to leave the account open and use it sparingly to maintain a low credit utilization ratio.

Manage your credit utilization

Maintaining a healthy credit card utilization ratio is a significant aspect of improving your credit score. Whether you consolidate debt, make payments more often, or request a credit limit increase, your efforts to improve your credit utilization can go a long way.