Why Does Higher Credit Utilization Decrease Your Credit Score?

By Dan Miller · April 15, 2024 · 6 minute read

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Why Does Higher Credit Utilization Decrease Your Credit Score?

Your credit utilization ratio is a factor that represents how much of your available credit that you have already used; the higher it goes, the closer you are to maxing out your credit limit, which can negatively impact your credit score.

Granted, there are several factors that make up your credit score, which is an important three-digit number that can impact your ability to borrow funds and at what interest rate. While the exact makeup and percentage of each factor varies depending on the company calculating the score, there are a few commonalities.

Since your credit utilization is one of the more important contributors to your credit score, it’s important to understand it. Here, you’ll learn what credit utilization is, how it impacts your credit score, and how to manage it.

What Is a Credit Utilization Ratio?

Credit utilization, history of payments, length of credit history, credit mix, and number of recent inquiries are among the factors that make up a credit score.

A simple way to calculate your credit utilization ratio is by dividing your current outstanding balance by your total credit limit. Your credit utilization ratio can be anywhere from 0% (you have a $0 balance) to 100% (your credit cards are all maxed out).

Generally, a low credit utilization ratio is viewed as a positive factor in determining your credit score. It can show that you aren’t living beyond your means and are managing debt well.

What Is Utilization Rate?

Your utilization rate is another name for your credit utilization ratio. In other words, it is determined by the amount of available credit you have and your current credit card balance. You can calculate your utilization rate by dividing your current balance by your total available credit. Lowering your utilization ratio can be a great way to maintain a good credit score.

How Utilization Rate Affects Credit Scores

Your utilization rate is one of the factors that makes up your credit score, along with other factors like your payment history, number and type of accounts, and your average age of accounts.

Having a low utilization rate is a positive factor in making up your credit score, so it can make good financial sense to keep your utilization rate down.

Financial experts typically recommend keeping your credit utilization at no more than 30%. While that’s not a rule, it’s a wise guideline to keep in mind.

Why Utilization Rate Affects Credit Scores

The reason your utilization rate affects your credit score is that it is explicitly named as a factor by the companies that calculate credit score. Having a higher credit utilization can decrease your credit score.

It makes a bit of sense, after all: If your total balance is approaching the available limit on your credit card, you may not have the financial cushion to weather an emergency. Having a balance too close to your credit limit might also indicate that you are struggling with cost of living or impulsive buying. That can give lenders pause if you are applying for additional credit.

How Can You Calculate Your Credit Utilization Ratio?

It’s fairly simple to calculate your credit utilization ratio, as long as you know the outstanding balance and your total credit limit for all your credit cards. Then it’s just a matter of basic math. Here’s how to find your number:

•   Add up your total balances across all of your cards.

•   Divide it by your total credit limit. The result is your credit utilization ratio.

Examples of Credit Utilization

Here are two examples of calculating your credit utilization ratio:

•   You have one credit card with a $10,000 credit limit, and you have a current balance of $2,000. Your credit utilization ratio is 20% ($2,000 divided by $10,000).

•   You have two credit cards, both with a $7,500 credit limit. You have a balance of $1,000 on one of your cards and a balance of $4,000 on the other card. Your credit utilization rate is 33.3% (a total balance of $5,000 divided by a total limit of $15,000).

How Can You Lower Your Credit Utilization Ratio?

There are a few ways that you can lower your credit card utilization. Consider these ideas:

Keep Credit Card Balances as Low as Possible

One of the best ways to lower your credit utilization ratio is to keep your card balances as low as possible. One way to do that is by following the 15/3 credit card payment strategy. This strategy has you make an additional credit card payment each month to keep your average balance as low as possible.

Pay Off Your Balances

In a similar vein, one way to keep your credit utilization ratio low is to start the habit of paying off your credit cards in full, each and every month. While there are differing opinions on whether you should pay off your credit card in full, there’s no doubt that doing so will help keep your utilization rate low.

Request a Credit Limit Increase

In addition to keeping your total credit card balance low, you can also lower your credit utilization ratio by increasing your total credit limit. Many credit card issuers will increase your credit limit after you have shown a positive usage history or if your underlying financials have changed.

If you have recently gotten a salary increase or paid down other debt, consider asking your issuer to increase your credit limit. This is not to say you should spend up to that limit, however (which could cause a decrease in your credit score). Rather, the goal is to make any balance you are working on paying down yield a lower credit utilization vs. the newly higher limit.

Apply for a New Credit Card

Because your utilization rate is calculated based on your total available credit, another way to improve your ratio is by applying for a new credit card. If you are approved, the credit limit on your new card will then be used in making the calculation. If nothing else changes, that will lower your utilization ratio.

This same concept is why it may not make sense to cancel unused credit cards. However, it could wind up negatively impacting your credit score as it could lower the length of your accounts on record, which is part of the score calculation.

The Takeaway

Your credit utilization ratio is defined as your total outstanding credit card balance divided by your total credit limit. This utilization ratio is one of the key factors that contributes to your credit score. Generally, a higher credit utilization leads to a lower credit score, and vice versa. If you are trying to build your credit score, lowering your utilization ratio can be a great way to make that happen.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.


Does high credit utilization lower credit score?

Yes, your utilization ratio is one factor that makes up your credit score, and a high credit utilization can lower your credit score. If you’re looking to build your credit score, one thing you can do is lower your utilization ratio by paying down your balance on existing credit cards or by increasing your total credit limit.

Why did my credit score drop when my credit utilization decreased?

While credit utilization is a major factor that makes up your credit score, it is not the only factor. Even if your credit utilization decreases, that may be offset by changes in some of the other factors (such as late payments) that make up your credit score, causing an overall decrease.

How does high credit utilization affect credit score?

Your credit utilization percentage is among the biggest factors that make up your credit score. A high credit utilization can be a negative factor that drags your credit score down. One way to build your credit score is to lower your utilization ratio, either by increasing your credit limit or paying down your existing balances.

Photo credit: iStock/Xsandra

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .


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