# How To Calculate And Lower Your Credit Utilization Ratio?

published on: July 22, 2024 last updated on: August 8, 2024

Do you have a credit card? If you have one, you already know how it works. You can make limited monthly purchases on credit, which you must repay over time. However, since your credit purchases affect how you boost your credit score, you must mind your credit utilization ratio wisely.

If you own a credit card, you can only borrow a limited amount of money monthly. This amount is known as your Total Available Credit. Therefore, your available and used credit ratio is your Credit Utilization Ratio.

## What Is the Credit Utilization Ratio?

As I explained above, your credit utilization ratio refers to your total and borrowed credit ratio. Therefore, it defines how much of your available credit and how you use it.

However, you must remember that your Credit Utilization Ratio considers the revolving credit of all your credit accounts. Therefore, your utilization ratio will consider all your revolving credit if you have multiple credit cards.

### What Is a Good Credit Ratio or Ideal Credit Ratio?

Ideally, your credit utilization ratio must be less than or equal to 30%. Therefore, you must not use more than 30% of your total available credit across all your credit cards and accounts.

For example, if you have a total revolving credit of \$100,000, you must try to use no more than \$30,000. Therefore, maintaining this ratio will ensure that your credit reports show a high credit score!

Moreover, according to FICO credit scores, here are the average Credit Utilization Ratios in the USA in Q3 2022 (Experian Data):

## How To Calculate Your Credit Utilization Ratio?

If you wish to know how to calculate your credit utilization ratio, be glad to know that calculating it is easy!

However, before you calculate your credit utilization ratio, you must know two things accurately:

• Your total revolving credit across all your credit cards and accounts
• Your total credit used across all your credit cards and accounts

Therefore, with these two numbers in hand, you can accurately calculate your credit utilization rate using a simple formula:

(Total Credit Utilized / Total Available Credit) x 100

For example, you have three credit accounts with available credits of \$10,000, \$15,000, and \$20,000. Therefore, your total available credit is the sum of these three = \$45,000.

However, you have used \$3,000 from the first account, \$8,000 from the second account, and \$5,000 from the third. Therefore, your total utilized credit is the sum of these three = \$16,000.

Therefore, you can now calculate your Credit Utilization Ratio by applying the formula above, which is:

Now, you can see that your credit utilization ratio is above 30% – the ideal credit utilization rate. Therefore, you must plan to repay your credit quickly and lower this ratio!

You are sadly mistaken if you think banks and credit bureaus don’t check your credit utilization ratio.

Credit bureaus and agencies check your credit utilization ratio monthly to assess and update your credit score. They check your credit cards weekly to see how much credit you have utilized.

Therefore, they always have a clear picture of how much debt you must repay and how much you have repaid.

Moreover, this information is crucial for them to calculate your credit scores and reports since your credit utilization ratio constitutes 30% of your credit score!

Here’s how your credit utilization ratio affects your FICO score and VantageScore credit scores:

### 1. Overall Utilization and Highest Utilization Rate

Your credit score depends a lot on two utilization rates:

• Overall Credit Utilization: This number reflects your total credit utilization across all your credit lines.
• Highest Utilization Rate: This number reflects your credit line with the highest credit utilization rate.

Therefore, your overall and highest credit utilization rates in a single account mustn’t cross the 30% mark!

### 2. Only Latest Transactions

FICO and VantageScore credit scores primarily take into account your latest credit transactions. Therefore, they will consider your last credit balance across all your accounts.

This is why you can quickly repay your loans to improve your credit score quickly!

### 3. Impact of Scoring Model Updates

Finally, FICO and VantageScore credit scores have various scoring parameters that change over time. Therefore, you must learn about the latest scoring changes if you wish to maintain a good credit score by keeping your credit utilization ratio.

For example, the latest FICO 10T and VantageScore 4.0 scoring models now consider your average credit utilization ratio. In addition, they will consider your historical credit card balances as well!

## How To Reduce Your Credit Utilization Ratio to Improve Your Credit Scores?

Lowering your credit utilization ratio will significantly improve your credit score, helping you get loans from banks quickly. However, lowering your credit utilization rate isn’t easy, requiring you to follow specific debt management measures over time.

Therefore, the best ways to lower your credit utilization ratio and improve your credit scores in 2024 are:

### 1. Make Payments Before Each Statement Period

If you have a credit card, you already know that the bank will mail you credit statements at specific intervals. We refer to this interval period as your Credit Statement Period or Billing Period.

However, this period often starts at the beginning of the month. Moreover, it might start from the day you open your account (which can be the middle or end of the month).

Therefore, if you make your due payments before the end of your statement period, the following credit statement email will show an updated credit balance. Therefore, doing so will lower your credit utilization ratio – helping you achieve higher credit scores consecutively!

### 2. Request a Higher Credit Limit

If you maintain a “Good” credit score for some time, you can request your bank to increase your credit limit.

Therefore, doing so can positively impact your credit score since you are increasing your credit limit, lowering your overall credit utilization ratio! However, you must ensure that you don’t make any new credit purchases or take any loans before the end of your statement period.

### 3. Update Your Income Statement

You must update your income statement with your bank whenever you change jobs or get an increment. However, you must do this since if your income increases and crosses a specific threshold (depending on the bank), your credit limit will automatically increase!

Therefore, this will automatically lower your credit utilization ratio and improve your credit score!

You may consider debt consolidation to improve your credit utilization ratio and credit score.

Debt consolidation is an excellent method for managing existing credit, which involves paying off all your loans by repaying them with one big loan.

Therefore, since your utilization ratio depends on your overall credit dues across all your accounts, debt consolidation through one account will positively impact your ratio and credit score!

### 5. Open New Credit Lines

Your credit limit will increase if you open new bank accounts and get new credit cards and lines.

Therefore, your credit utilization ratio will decrease if you don’t make new credit purchases or take loans! Moreover, opening new credit lines automatically improves your credit score!

### 6. Never Close Credit Lines

Like the point above, if you open new credit lines, it’s best not to close your existing credit lines.

Therefore, even if you don’t use one of your bank accounts or credit cards, don’t close it. This is an intelligent way to keep your credit limit intact and increase it by opening new lines of credit!

Therefore, this will automatically decrease your credit utilization ratio since your credit limit increases while your credit use remains unchanged. Moreover, your credit score will increase if you do so!

## Don’t Forget to Manage Your Credit Utilization Ratio!

Managing your credit utilization ratio to lower it is one of the best ways to manage your credit use and improve your credit score!

Therefore, if you wish to get loans and credit cards quickly in the future, you must lower your credit utilization rate. I hope you follow the points above regarding reducing it to improve your credit reports and scores! Thanks for reading this post! However, if you have any queries, please comment below! Moreover, share this post with others if you find it useful!

## Debamalya Mukherjee

An active fintech enthusiast, Debamalya has spent around half a decade trying to help people understand the nuances of technology and finances through his writing. Apart from being a phenomenal writer, he believes money can buy happiness - as long as you know how to use it wisely! He’s legit, out on a mission to help people earn more and spend them wisely. In fact, he believes that it is literally ‘his calling’ to become a professional tech and finance blogger for financeteam.net.