One of the first steps I recommend when repairing credit is to pay down any credit accounts where the balance is more than 25% of the account’s credit limit. If you’re not sure what balances are being reported on your credit report, I suggest you get an up-to-date copy of your credit report from TransUnion.

When your credit score is calculated, substantial consideration is taken on a simple calculation. This calculation is called your “utilization”. It simply means, “How much of your total available credit are you currently using?” In other words, “Is this person spending money without keeping in mind it must be paid back?” Utilization is a huge factor when a credit score is calculated.

Two things are taken into consideration in regards to utilization when your credit score is calculated. First, your overall utilization. This is calculated by adding together the balances of all of your revolving accounts, and then adding together all of the credit limits. Then divide the balance by the limit.

Overall Utilization Example

  • Credit Card #1 — Balance: $300 Limit: $500
  • Credit Card #2 — Balance: $100 Limit: $300
  • Credit Card #3 — Balance: $500 Limit: $1000
  • Total balance: $900 Total credit limit: $1800
  • Utilization = $900 / $1800 = 50% Total revolving utilization

In addition to your overall credit utilization, individual credit account utilization is also taken into account. This basically means that if you have ANY individual account where the balance is over 25% of the credit limit, it is likely hurting your credit. Therefore, even if your overall credit utilization is under 25%, if any one of those accounts have a balance over 25%, your credit score is affected.

It’s about ratio, not actual numbers

I have been asked if the credit limit dollar amount matters. Specifically, if one has a credit card with a credit limit of $200, and every month it’s reported that this person uses 75% of the available credit, does the same (as previously stated) apply. Logic may tells us that it shouldn’t apply because it’s likely that this person can easily pay off a $200 balance every month. However, utilization does apply –the limit does not matter. If you have a credit card with a $200 credit limit, spending over $50 will hurt your credit score.

When you are repairing or building credit, it’s good to have a credit card even if the credit limit is low. However, as you begin to build credit, it is in your best interest to request credit limit increases when the time is appropriate. Remember: keep your utilization as low as possible –preferably at or around 25%. The right credit balance to limit ratio is key to optimizing your credit score.

Balance To Limit Ratio Calculator

Now that you understand how it works, check out this Balance to limit ratio calculator to see how you’re doing.