Updated September 27, 2021

If you want to earn great credit scores, pay your bills on time every month.

The previous statement is good advice; however, it is also incomplete. Paying your bills on time is not enough to achieve and maintain great credit scores.

Only 35% of your FICO® Score is based upon your payment history. The other 65% of your FICO Score has nothing to do with how timely you pay your bills.

Another 30% of your FICO Score, plus a significant portion of your VantageScore credit score, is based on information found in the “Amounts Owed” category of your credit reports. The primary factors that matter in this credit history category are those little pieces of plastic (or metal) you carry around in your wallet: AKA your credit cards.

What Is Revolving Utilization?

Revolving utilization is a term that people in the credit industry use to describe how much (or rather what percentage) of your credit card limits are in use. Your revolving utilization ratio is also known as your debt-to-limit ratio or your credit utilization ratio.

Credit utilization is a measurement of the percentage of your credit limits you’re using. Here is a quick look at how revolving utilization is calculated on a credit card account single account.

• Credit Limit: $5,000
• Account Balance: $3,500
• Revolving Utilization Percentage: Balance ($3,500) Divided by Limit ($5,000) = Revolving Utilization (70%)

Two Types of Credit Card Utilization

While we’re talking about what a credit card utilization is, there’s another fact you should know. There are two types of credit utilization — aggregate (or overall) and per-card utilization.

The per-card credit card utilization rate measures how much of your credit limit you’re using on a single account.

The aggregate credit card utilization ratio, meanwhile, looks at your overall credit utilization behavior.

You saw an example of single-account utilization above. Here’s a look at how a scoring model calculates overall credit utilization rates.

• Credit Limits: $5,000 (Card #1) + $5,000 (Card #2) + $10,000 (Card #3) = $20,000 Total Credit Limit
• Account Balances: $3,500 (Card #1) + $1,500 (Card #2) + $0 (Card #3) = $5,000 Overall Balance
• Aggregate Revolving Utilization Percentage: Account Balances ($5,000) Divided by Total Credit Limit ($20,000) = Overall Revolving Utilization (25%)

How Credit Utilization Impacts Your Credit Score

When it comes to credit card utilization, the lower the percentage, the better.

Whether you’re calculating your score with a FICO or a VantageScore credit scoring model, a high credit utilization ratio can hurt you. Credit scoring models are designed to reward you when you keep your credit utilization rates low.

Believe it or not, high credit utilization has the potential to damage your credit score even if you never miss a single payment due date on your credit card account.

Why Is Credit Utilization Considered in Your Credit Scores?

Your revolving utilization rate is an important consideration in your credit scores for one important reason. It is an effective way to predict credit risk. And, after all, predicting risk is the whole point of a credit score.

Decrypting Credit:

FICO Scores and VantageScore credit scores predict the likelihood that you’ll pay a credit obligation 90+ days late in the next 24 months.

When you revolve a high outstanding credit card balance relative to your credit limit, you represent a higher credit risk than someone whose credit report shows a lower balance-to-limit ratio.

People with higher credit utilization rates are statistically more likely to default on their debts.

Revolving Accounts vs. Installment Accounts

Of course, all debt is not created equal — at least not where credit scores are concerned.

When you take out a mortgage loan or an auto loan, for example, you are opening an installment loan. A Credit card, by comparison, is a revolving credit account.

Installment debt is less risky for lenders to extend because these loans tends to be secured by some sort of collateral (aka your house or your vehicle). If you stop making your payments, the lender can seize and resell your collateral to recuperate some of the money it loaned you.

However, credit card debt is different.

Because of the nature of credit card debt, it is much more predictive of increased credit risk than installment debt. And that makes sense if you think about it.

High Credit Utilization Indicates Higher Credit Risk

The boring version of why higher credit utilization indicates higher credit risk has to do with a bunch of math. (Unless you’re a credit nerd like me, and then the math isn’t boring at all!) Here’s a basic breakdown of what happens behind the scenes.

• Credit score developers study a bunch of credit reports of people who defaulted on credit obligations.
• They go back in time 24 months and look for trends in that group of credit reports.
• People with high credit utilization rates were more likely to default on debts within the next two-year window.

But you can also look at the situation from a common sense perspective to help understand why taping into too much of your total available credit could signal potential problems on the horizon.

Imagine the Following Scenario

Let’s say you begin to struggle financially due to an illness, divorce, job loss, or even just bad financial management habits like overspending. Now ask yourself this question. What’s the first credit obligation you would probably let slide if you were in the position of having more bills than money at the end of the month?

You probably would not skip your mortgage, your rent, or your auto loan payment — at least not if you could help it. Keeping roof over your head and a vehicle to get you back and forth to work would be priorities in a financial crisis.

Credit card payments, however, are another story. And this is why people are much more likely to skip credit card payments first in the event of a financial crisis.

Additionally, increased credit card balances might also indicate that a financial problem is looming. If a consumer loses her job, it’s very common to rely upon credit cards to help finance every day expenses until a new source of income can be secured.

As you can see, a credit report that shows you are revolving balances on your credit cards from month to month could be a red flag to lenders. And if you have high credit card balances compared to your credit limits, this behavior could make you appear to be a higher credit risk if you apply for new financing or services.

Decrypting Credit:

A high balance on an installment loan isn’t as troubling as high credit card utilization. It’s normal to have a high balance relative to the original loan amount on a mortgage or auto loan. That doesn’t indicate elevated risk or that you may be in financial trouble.

How to Reduce Your Credit Utilization Rate

If you want to earn and keep good credit, it’s important to keep a handle on your credit card utilization rates. Here are five tips that might help you.

1. Pay in full every month.

One of the best ways to protect your personal credit score and your bank account is to pay your credit card balances in full every month. This good habit has the potential to help in two ways.

Paying your credit card statement balance in full may:

• Protect your credit score.
• Help you avoid wasted money on interest fees.

You should also be aware that your credit card balance (and other account details) typically only updates once a month on your credit report. That update happens somewhere around your statement closing date.

Decrypting Credit:

Your statement closing date is when your credit card company sends new account information to each credit bureau — Equifax, TransUnion, and Experian.

So, the timing of your payment is also important. If you want to keep a low credit utilization rate on your credit report, aim to pay off your outstanding balance before the statement closing date on your credit card account.

2. Ask for a credit limit increase.

Paying off your credit card balances each month is the best way to maintain a low credit utilization ratio. But if you can’t afford to knock out all of your credit card debt at once, asking your card issuer for a credit limit increase might help you in the interim.

An increase in your credit line also has the potential to lower your credit utilization ratio. Here’s an example.

• Original Credit Limit: $2,500
• Credit Card Balance: $2,500
• Credit Utilization Rate: 100%

Now, imagine your credit card company approved your request for a credit limit increase.

• New Credit Limit: $5,000
• Credit Card Balance: $2,500
• New Credit Utilization Rate: 50%

In the scenario above, the credit limit increase would cut your utilization rate in half, even though you still owe the same amount of money to your card issuer.

But be careful with this approach. Your goal should be to pay off your high-interest debt. That credit card debt will still waste your money every month, even if it isn’t hurting your credit score as much.

3. Consider a new credit card account.

Remember, a credit scoring model will look at your overall credit utilization and not just your individual accounts. Because this is true, opening a new credit card could lower your credit utilization rate. And that might increase your credit score as a result.

This phenomenon is something you might encounter if you open a new credit card to do a balance transfer. (We’ll talk more about those below.) If you qualify for a new card and increase your total credit limit as a result, that move might have a positive impact on your credit score.

Of course, this is another approach where you should exercise caution.

Trying to reduce your credit utilization rate without actually paying down your credit card debt can be a slippery slope. Be honest with yourself, and do not open another credit card if you think you’ll be tempted to fall further into debt.

4. Think about consolidating your credit card debt.

Consolidating your credit card debt can be another effective way to lower your revolving utilization rate. This move might be good for your overall financial wellbeing, too.

When you consolidate debt, you move your existing balances to a new account. You can accomplish this goal with a consolidation loan (aka an installment loan) or a credit card balance transfer.

Of course, credit card consolidation is another one of those strategies that doesn’t actually reduce your debt — at least not at first. So, it will be up to you to be smart about your plan.

Before you consolidate credit card debt, you should make two commitments to yourself.

• Make up your mind to start paying down your consolidated debt. Your best bet is usually to do so as aggressively as possible. But even if you can only afford to pay a little extra right now, do what you can.
• Determine to avoiding more credit card debt. The last thing you want to do is open a new personal loan or credit card and then turn around and run up the balances on your original credit cards again. That particular money mistake can be a recipe for disaster.

5. Become an authorized user.

The final strategy you might consider if you’re aiming for a lower credit utilization rate is becoming an authorized user. With this approach, you start by asking a loved one to add your name to an existing credit card account.

Let’s say your spouse has a credit card account. The account is well-managed with no late payments and a low credit utilization rate. (Those details are important.)

When your spouse adds you onto the account as an authorized user, the card issuer may report the card to the credit bureaus under your name, too. If the account shows up on your credit report, it could increase your total available credit numbers.

What’s the potential result here? Your aggregate credit utilization ratio could go down, and your credit score might go up.

Word of Caution: You don’t want to pay a stranger to add you as an authorized user on their credit card. Paying to be added to a tradeline could land you in hot water.

Moving Forward

Revolving unpaid credit card debt on your credit reports from month to month will almost certainly lower your credit scores. And carrying outstanding credit card balances is also bad for your wallet (unless you’re taking advantage of a 0% APR introductory offer).

But there’s good news, too. It is 100% possible to stop wasting money on interest and regain any lost credit score points. You just need a plan to start to paying down your credit card debt.

If you can pay your credit cards down to zero all at once, that’s great. But not everyone can afford this approach. There’s nothing wrong with chipping away at your credit card debt a little bit at a time if that’s what you need to do.

As you lower your credit utilization rate, you should earn incremental credit score increases. It’s not an “all or nothing” scenario. So, even if takes you months or years to finally wipe out the credit card debt you owe, you may still be able to celebrate a lot of little credit score improvements along the way.

Michelle Lambright Black is a leading credit expert, writer, speaker, and credit expert witness with nearly two decades of experience in the credit industry. She is an expert in credit reporting, credit scoring, financing (mortgages, credit cards, loans), debt eradication, budgeting, saving, and identity theft. She’s featured in print monthly with brands such as FICO, Forbes, Reader’s Digest, LendingTree, Experian, and more. Connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).