“Credit utilization ratio” (also known as “debt utilization ratio” or “debt-to-credit ratio”) might sound complicated, but it’s easier to understand than you’d think. Lowering your credit utilization ratio can help impact your credit score.

What is a Credit Utilization Ratio?credit utilization chart

Most people haven’t heard of credit utilization rates, but they typically make up almost a third of your credit score (the “Amount owed” in the table). In fact, after payment history, credit utilization is the biggest category considered in how your credit score is calculated.

Utilization is simply how much of your available credit you’re using. That includes the percentage of each credit line you’re using, as well as the percentage of your total available credit. A sampling of credit scores found that, generally speaking and assuming all else being equal, those with lower utilization had a higher credit score.

Why Do Creditors Care About Your Utilization Ratio?

Using more credit could make you less likely to pay back what you’ve borrowed. A high utilization ratio fits the profile of someone who might be “living on credit.” That’s a fiscally dangerous way to live, and a high risk for potential lenders.

A credit score is a prediction of how likely you are to pay your credit obligations as agreed. Potential lenders want to know that you pay your bills on time and don’t rack up debt to live above your means.

How to Improve Your Credit Utilization

The good news: Lowering your utilization can help your credit score. The simplest way to lower your utilization is to pay down your debts. Often, people will ask for credit limit increases on existing cards, which may have the effect of lowering their utilization ratio, however this can negatively affect their score as higher credit limits are often seen as more risky in general. You should only ask for credit limit increases when there is a real need and if you are able to pay down your balances in a timely manner. Otherwise you could be at greater risk of getting too far in debt overall, which can harm your score. So paying down existing credit cards and keeping balances low is generally acknowledged as the best course of action.

The bottom line is, a lower utilization rate bodes well for your credit score as long as you consistently pay all your bills on time every month. The higher your credit score, the better. Most experts recommend keeping your utilization as low as possible.

Originally published March 24, 2016.

Updated May 13, 2019.

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