How credit utilisation works

Resources · Cards, loans and credit · 4 min read Building

Key points

• Credit utilization (or utilisation) is how much of your available credit you’re using, as a percentage.
• It’s usually worked out across all your cards and for each card on its own.
• Many credit scoring models look at it, alongside your repayment history.
• It changes as balances change, so it can move from month to month.

Credit utilization is the share of your available revolving credit you’re using right now. Take your total card balances and divide by your total credit limits. Owe $2,000 across cards with $10,000 of limits? Your utilisation is 20%.

It mostly applies to credit cards and other credit lines with a limit you can borrow up to and repay again. Loans for a fixed amount, like a car loan, are usually treated differently. For how it fits into scores more broadly, see how credit scores work.

How credit utilization is worked out

There are two common ways to look at it.

Overall: add up all your card balances, add up all your limits, and divide.

Per card: divide each card’s balance by that card’s limit.

Here’s an example with three cards. The same maths works in any currency.

Overall, this person is using 52% of their available credit. But Card 2 is sitting close to its limit at 90%. Some scoring models look at the overall figure and at individual cards, so one nearly maxed-out card can count even when the total looks moderate.

What moves the ratio

The ratio has two parts. So it can move from either end.

Start with the balance side. Paying down a balance lowers the ratio. In the example, paying $1,500 off Card 2 brings that card to 40% and the overall figure to 37%. New spending pushes it up, even if you fully plan to pay it off.

Then the limit side, which catches people out. Close a card and its limit disappears. If Card 3 were closed, the same $5,200 would be measured against $8,000 of limits, and utilisation would jump to 65%. A limit decrease does the same kind of thing. A limit increase works the other way, lowering the ratio without the balance changing, though applying for one may be treated like a credit application.

That’s why closing a credit card can affect a score even when you owe nothing on it.

Why timing matters

Utilisation is a snapshot. It’s based on the balances reported to credit reporting agencies, and card providers usually report once a month. The reported balance is often close to your statement balance, but the timing varies by provider.

Here’s the odd part. Paying in full each month doesn’t always mean low utilisation. Spend $3,000 on a $4,000 limit, pay it off after the statement, and the reported balance may still show 75%. A payment before the statement date, on the other hand, can lower the reported balance.

The good news? It isn’t permanent. In many scoring models utilisation is based on your most recently reported balances, so it can improve once lower balances are reported. Late payments are different. They stay on a report much longer.

How much it matters

Scoring models don’t publish their exact formulas, and they differ between agencies and countries. In general, lower utilisation tends to be seen more favourably than high. Very high utilisation, especially near or over a limit, can look like financial pressure. But repayment history usually matters at least as much, and often more.

You’ll find rules of thumb online for a “good” percentage. Treat them as rough guides, not fixed lines, because each model weighs things its own way. Credit reporting agencies and scoring systems differ between countries, and how much weight utilisation gets depends on the system where you live.

Utilisation and paying off debt

Paying down card balances helps in two ways at once. You pay less interest, and your utilisation drops.

Which card first, though? Some people go after the card with the highest rate, which usually costs less in interest. Others target a card that’s near its limit. Each has a trade-off, and the choice is yours. It depends on whether a credit application is coming up and what matters most to you.

Common questions

What is a good credit utilization ratio?

There’s no single number that holds for every scoring model. In general, lower tends to be viewed more favourably. Very high utilisation, close to your limits, tends to be viewed less favourably.

Does utilisation reset every month?

In many scoring models it’s based on your most recently reported balances. So it changes as those balances change.

Does paying my card in full help utilization?

It stops balances from building up. But depending on when your provider reports, the balance from before your payment may still be the one that counts.

Try it

See how fast different payments could bring your card balances down in the credit card payoff calculator. To see all your debts together, find your Freedom Date.

General information only, not financial advice. Your situation is your own.