Credit utilization is an important term to understand in terms of how it can affect your credit score. Basically, it means how much of the available credit you currently have charged on a credit card (i.e., balance-to-limit ratio).
In fact, lowering high balance-to-limit ratios on your credit cards is one of the easiest ways to quickly increase your credit score.
Steps to Calculate Your Credit Utilization
Calculating your utilization is so easy you don’t even really need a calculator. Here is the easiest way to find out where you stand.
The first step is to get a current copy of your credit report.
Once you have your credit report, find all of your credit cards. You’re looking for two numbers:
- Current Balance
- Credit Limit
Lastly, you’re going to calculate the utilization for each credit card by dividing the current balance by the credit limit and then multiplying that result by 100. The result will be your utilization percentage for that credit card.
Let’s use a quick example to just illustration exactly how utilization works.
- Current Balance: $500
- Credit Limit: $1200
In this example, we would divide $500 by $1200, which equals 0.42 (rounded up). Next, we multiply 0.42 by 100 to get 42%. In this instance, 42% is above the recommended 25% so paying down that balance would be a great way to improve the credit utilization.
Understanding Your Total Utilization
I should also mention that in addition to the credit utilization on each individual credit card, your credit score also takes into account your total credit utilization across all of your credit cards.
However, by keeping your credit card balances lower than 25% will ensure that your total credit utilization is also below 25%. Check out my article that goes into this in detail.
Additional Steps to Improving Your Credit Score
In addition to maintaining the proper balance-to-credit ratio, you can also improve your credit score by removing negative items such as collections, late payments, and charge offs. If you have any negative items on your credit report, they can (and should) be removed.