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    What is 30% Credit Utilization and Why Does It Matter?

    Are you using more than 30% of your maximum credit available?

    You could be lowering your FICO score without even knowing it.

    Keeping your credit utilization below 30% is a key strategy that will help you boost your credit score.

    If this is the first time you’ve heard of the 30% rule, we’ll cover everything you need to know. Let’s start with the basics.

    What Exactly is Credit Utilization?

    Credit utilization may sound complicated, but it’s really a simple concept. Here’s how it works.

    Your credit utilization is simply the amount you owe on your credit accounts compared to the total available credit available to you.

    Here’s an example.

    If you have one credit card with a $2500 limit and you owe $500 on the card, your credit utilization would be 20% - but how did we get that figure?

    • Credit utilization = the amount you owe / your total available credit
    • In our example, that would equal $500/$2500, or 0.2. You can multiply this amount by 100 to get a percentage figure, which would be 20% in this case.

    At 20%, your credit utilization would be comfortably below 30%, and would not have a negative effect on your credit score.

    To calculate your credit utilization, you’ll need to total the amount you owe on all your credit cards and divide that by the total of their credit limits.

    Let’s take a look at two more examples in the table below.

    Credit CardAmount OwedCredit LimitCredit Utilization

    In this example, the Amex card has a reasonably good credit utilization of 26.7%, but the Visa is way too high at 80.0% - in fact, it’s almost maxed out.

    With a total credit utilization of 44.4%, this customer’s credit utilization will definitely have a negative impact on their credit score.

    They’ll need to pay down that Visa card in order to drop their total credit utilization below 30%.

    How is Credit Utilization Different From Debt-to-Income?

    Credit utilization and debt-to-income are two important ratios that affect your chances of qualifying for credit, but what’s the difference between them?

    As we mentioned above, your credit utilization ratio is the amount you owe on your credit cards divided by your total available credit limit.

    Your debt-to-income ratio is the total amount you pay each month in debt installments divided by your gross income (income before taxes).

    The debt-to-income ratio is calculated by taking the following payments into account:

    • The minimum payments due on your credit cards
    • Your auto loans
    • Installments due on your student loans
    • Your monthly rent or mortgage payment
    • Personal loan repayments and any other recurring debt installments

    If you earn $3000 before taxes and your monthly debt payments come to $1500, you’ll have a 50% debt-to-income ratio.

    Your credit utilization ratio has a big effect on your credit score, while your debt-to-income ratio doesn’t - but that doesn’t mean it’s not important.

    While your debt-to-income ratio doesn’t affect your credit score, it does affect your chances of being approved for credit because it’s a measure of how much you can afford to pay in monthly installments.

    A debt-to-income ratio of 50% or less is seen as favorable by credit providers because it indicates that you have surplus cash available each month to cover your installments.

    What is the 30% Utilization Rule? Why Does it Matter?

    Credit utilization counts towards approximately 30% of your credit score, second only to your payment history which counts for about 35% of the total score calculation.

    The lower your credit utilization is, the higher your credit score will be.

    • A high credit utilization ratio indicates that you’re borrowing heavily, which will push up your monthly debt repayments.
    • From the credit bureau’s point of view, this is risky behavior because it limits your ability to make payments on any new types of credit you may apply for in the future.

    To keep your credit score as high as possible, it’s recommended that you reduce your credit utilization to 30% or less.

    In fact, the ideal ratio is probably 0%, but you can always charge purchases to your card as long as you pay the balance in full each month.

    How Can I Improve My Score By Sticking To The 30% Utilization Rule?

    If you’re looking to increase your credit score, one of the simplest and quickest ways is to reduce your credit utilization to below 30%.

    • Unlike payment history which takes a long time to impact your credit score, low credit utilization can give your score a quick boost.
    • By reducing your credit utilization, you’ll also reduce your monthly installments and drop your debt-to-income ratio. This will help you to get approved for credit in the future.
    • Since credit utilization counts 30% toward your credit score, you’ll see a significant increase in your score by reducing utilization over the space of a few months.

    Lowering your credit utilization is an essential strategy for raising your credit score - here’s how.

    How Can I Get My Utilization Ratio to 30%?

    Your credit utilization ratio is determined by how much you owe on your credit accounts and how much your total available balance is.

    That means there are two main ways to lower your credit utilization.

    • Reduce your credit account debt - you can do this by paying down your credit cards with surplus cash.
    • Increase your available limits - you can do this by applying for a credit limit increase on your cards or by applying for a new credit card and not spending much on it.

    In the example we used earlier, where $2000 in credit card debt was owed on a total balance of $4500, you could reduce your total credit utilization from 44.4% to 30.0% in two ways:

    1. Calculate what 30% of the total available balance would be (0.3 x $4500 = $1350) and pay down the total debt of $2000 to reach $1350. That means you’d need to pay $650 to reach this level.
    2. Calculate what your total available balance would need to be so that $2000 (the amount you owe) equals 30% of the total balance ($2000/0.3 = $6,666). To reach a total balance of $6,666 from the current total of $4500, you would need to apply for a credit limit increase or a new credit card with a limit of $2166 or more.

    It’s important to remember that applying for a new credit card means that your credit provider will do a hard credit check - and if the application is rejected, that result will appear on your credit report.

    It could also lower your credit score, and that’s the opposite of what you want.

    It’s always better to reduce your credit utilization by paying down your credit cards with surplus cash.

    You may need to adjust your monthly budget and free up the cash you need.

    Key Takeaways

    Credit utilization is a major factor in the calculation of your credit score.

    By keeping it under 30% you’ll raise your FICO or VantageScore and improve your chances of getting credit in the future.

    Paying down your credit cards is the best method of lowering your credit utilization ratio, and you’ll reduce your debt-to-income ratio at the same time.