What is a Utilization Rate?

A utilization rate is the percentage of credit you are “utilizing” vs. the amount of credit you have available. So, if you have a credit card with a $10,000 credit limit on it but you are only using $400 of the available credit, your utilization rate is 4%.

Let’s use another example. Let’s say you wanted to start a business and a good friend of yours noticed and offered to lend you $50,000 to do so. You tell him you don’t need $50,000 you just need a $1,000 to get the idea off the ground. In this scenario, if you accept the money you’ll only have utilized 2% of the credit that was offered to you, so your utilization rate would be 2% in that scenario (although the idea is quite different when it’s with a friend, the concept is still the same).

Is Your Utilization Rate Important?

Yes, your utilization rate is very important. In terms of credit, your utilization rate accounts for approximately 30% of your total credit score. This factor alone could be the difference between a good score and a bad score. If you are fully utilizing all your available credit you’re not going to be in a good credit position since you technically don’t have any more available credit on your credit cards.

When Does FICO Calculate the Utilization Rate?

So, FICO isn’t actually the one calculating your utilization rate that is done by the three credit bureaus: TransUnion, Experian and Equifax. The credit bureaus can calculate your utilization at their sole discretion during any time of the money they chose. This is part of the reason the bureaus get different credit scores even though they use the same FICO guidelines to calculate a given consumer’s credit worthiness. The utilization rate that is being factored into you credit score can typically be calculated at any time. So, if you have a rolling balance on your credit cards it could be that a higher utilization is being reported in the calculation of your credit score. There isn’t much you can technically do about this except try to keep your utilization rate as low as possible at all times. Otherwise you can also look to pay your credit card statement off in increments throughout the course of the money making sure that your utilization rate is always near zero whenever possible.

How Can You Improve Your Utilization Rate?

You can improve your utilization rate by having more available credit. This can be done in two ways. You can increase your available credit by either utilizing less credit and not carrying any credit card balance at all, meaning you are paying off your balance at the end of each statement period. Or you could also increase your credit limit by applying for a larger credit limit on your cards or opening up new lines of credit. However, remember the utilization rate is calculated as an average on all your credit cards so more credit cards might not necessarily equate to a better utilization rate. More important is the average across all credit cards. So, if you have smaller balance credit cards that are highly utilized it may also make sense to try to pay those down first in order to get your utilization rate as low as possible. This will tend to have a positive impact on your credit in the long term as well since you’ll be lowering your “average” utilization rate.

Use it or Lose It

There is no benefit to be over-utilized! Don’t listen to myths that suggest you use your available credit before you lose it. That is simply false and not true at all. It’s always to your benefit to keep as a low a utilization rate as possible. In fact, the lower your utilization rate the higher the chance of you receiving increases in your lines of credit.