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.
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?
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 Card | Amount Owed | Credit Limit | Credit Utilization |
| Amex | $800 | $3000 | 26.7% |
| Visa | $1200 | $1500 | 80.0% |
| Total | $2000 | $4500 | 44.4% |
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%.
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:
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.
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.
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.
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%.
Lowering your credit utilization is an essential strategy for raising your credit score - here’s how.
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.
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:
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.
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.
