Better Credit Blog | Credit Help For Bad Credit

Calculating your credit utilization ratio can tell your credit health.

New creditors pay attention to this value which measures how much of your available credit you’re currently using.

For example, if you’re using 50 percent or more of your total available credit, it’s harder to maintain a good credit score.

Do you know your credit utilization ratio? It’s easy enough to calculate this ratio when you know where to look.

How to Calculate Your Credit Utilization Ratio

Calculating your utilization is easy. You may not even need a calculator. Here is the easiest way to find out where you stand.

First, get a current copy of your credit report. Visit annualcreditreport.com to access your credit report from all three credit bureaus — Experian, Equifax, and TransUnion.

Once you have a credit report in front of you, find all of your credit card accounts.

You’re looking for two numbers within each of your credit card accounts:

• Current Balance: How much you currently owe on the account.
• Credit Limit: The maximum amount you could borrow.

To calculate the utilization rate for each credit card, divide the current balance by the credit limit and then multiply that number by 100. The answer will be your utilization percentage for that credit card.

A Quick Example

Let’s use a quick example to show exactly how credit utilization calculations work:

• Current Balance: $500
• Credit Limit: $1,200

In this example, we would divide $500 (the card’s total balance) by $1,200 (the card’s total credit limit), which equals 0.42 (rounded up).

Next, we multiply 0.42 by 100 to get 42 percent.

I recommend 25%

I recommend keeping your credit utilization ratio under 25 percent on all of your credit cards in order to optimize your credit score.

Some personal finance blogs will say otherwise. I’ve even seen a few posts saying you could use up to 50 percent of your available credit limit without hurting your score too much.

One thing’s for sure: Credit utilization is an important factor in calculating your credit score. It comprises 30 percent of your FICO score.

Since FICO focuses so much on your credit card utilization, lowering high balance-to-limit ratios on your credit cards is one of the easiest ways to quickly increase your credit score.

You can get a lot of bang for your buck by lowering your credit card balances compared to their credit limits. That’s one reason I recommend a 25 percent utilization rate.

Understanding Your Credit Utilization

In addition to your credit utilization rate for each individual credit card, your credit score also takes into account your total credit utilization across all of your credit cards.

A lot of people think they can lower their total credit utilization by keeping some paid-off accounts open. Common sense says those $0 balances will compensate for your maxed out balances, lowering your average credit utilization.

Sadly, this isn’t entirely true. Yes, you can help your score by keeping paid-off accounts open or getting new credit cards and not using them.

But your individual accounts also matter individually.

Even if you have a low credit utilization average across all your accounts, having some accounts that are maxed out or approaching their credit limit will still hurt your credit score.

So try to keep all your credit card balances lower than 25 percent of their credit limit.

Check out my article that goes into this in detail.

What About Overall Credit Utilization?

I get emails from people occasionally who think their student loans, personal loans, and mortgage hurt or help their credit utilization rate.

This isn’t true. Your credit usage rate reflects revolving loan debt such as credit cards and credit lines such as your bank account’s overdraft protection — debt whose balances you can directly control.

On the same note, paying down personal loans, auto loans, and other fixed loans won’t help your credit usage rate.

So when you calculate your credit utilization rate, don’t worry about fixed loans. Focus on your credit card debt.

Of course, fixed loans help and hurt your credit score in other ways, especially through payment history.

Payment history has an even bigger impact on your score than available credit.

Additional Steps to Improving Your Credit Score

Caring for your credit history can pay off in the form of lower interest rates and access to the best credit cards with no annual fees and cashback rewards.

So along with attacking your high utilization rate, avoid late payments, try to keep a mix of credit accounts, and don’t apply for new credit cards you don’t need or won’t qualify for.

Inaccuracies Make a Big Impact

Some of the biggest credit history problems come in the form of inaccuracies and mistakes on your credit report.

So when you calculate your credit utilization ratio, keep an eye out for mistakes on your credit report.

Credit card issuers sometimes report late payments even when you paid your bill on time.

Other times they show higher balances than you owe or they don’t report paid-off balances even after you’ve gotten a balance transfer card.

Getting inaccurate information removed from your credit history could launch your credit score to new heights.

Once again, the first step will be getting that free copy of your credit report if you don’t already have one.

If you find inaccurate information, send dispute letters to the credit bureaus and the credit card companies as necessary.

Monitoring Your Credit Is a Must

You’ll need to keep an eye on your credit report to make sure future inaccuracies don’t pull down your credit score.

You can get free credit score monitoring from apps like Credit Sesame and Credit Karma.

These services won’t show your FICO score, but they will show your VantageScore or other credit scoring models that typically show similar data.

This kind of free service provides just enough insight to help you detect credit problems before they limit your borrowing power.

It’s much better to learn about a credit score problem from an app than it is to learn about the problem after you’ve applied for a new loan.

Professional Credit Repair Can Help

If you don’t have time to write letters and follow up with the credit bureaus, consider hiring a professional credit repair company.

For this, I suggest you check out Lexington Law. They’ll take care of you.

Lexington Law knows your rights and will help you exercise them. You’ll have to pay a monthly subscription rate and a one-time set up fee.

But spending these hundreds in fees could be worth it if you save thousands in interest rates on your next mortgage.

A higher score can help you unlock more available credit which lowers your credit utilization ratio even more. It’s a win-win.