How Much of Your Credit Should You Use?

Nikhil Goswami  - Supplements, Finance, Dating, Crypto

You’re an adult now, and you’re probably responsible for your finances. You have a credit card or two, and you’ve even taken out a mortgage or car loan.

You might be wondering how much of your credit you should use. Should you keep your balance below 30 percent of your available credit? Or should you aim for zero percent? What’s the right amount to use?

There’s no one-size-fits-all answer to this question.

It depends on your individual situation — including how much money you make, how much debt you have, and whether or not you’re making monthly payments on time every month. But some general guidelines can help you determine what works best for you.

Credit Card Percentage Use?

Credit utilization is one of the most critical factors in your credit score. It’s also a little confusing to understand.

Here’s the lowdown:

Credit utilization is how much of your credit you use at any given time. It’s expressed as a percentage and calculated by dividing your total credit card balances by your total credit limits. If your balance is $1,000 and your limit is $10,000, it would be 10%.

Credit card issuers likely won’t allow you to carry too high a balance on any card.

In general, the more you use, the lower your scores will be — but there are exceptions.

The formula for calculating your credit utilization ratio is as follows:

Credit Used / Max Credit Available = Credit Utilization Ratio

For example, $1,000 / $10,000 = 10% Credit Utilization Ratio

The lower this number is, the better your score will be. Generally speaking, you want to keep it below 30% to avoid damaging your score.

For example, if you have one credit card with a $5,000 limit and another with a $10,000 limit and charge $500 on each card every month for six months straight, that adds up to $3,000 in debt on those two cards alone (a total of $6,000).

That would be good use by lenders because it shows that you can handle debt responsibly and pay off what you borrow in full every month.

The lower your credit utilization ratio is, the better it is for your score.

At least, that’s what most experts say. But there are some who disagree with this premise, saying that a high credit card balance doesn’t hurt your score as much as it once did.

What’s Included in Your Credit Utilization Rate Calculation?

There are several different credit scoring models, each using a slightly different formula to calculate your credit utilization rate. Here’s a look at what they all have in common:

They don’t include any paid-off, closed accounts in your credit reports. If you have an old account that has been paid off, but it’s still included on your reports, it won’t be factored into your score.

FICO may include any closed account that still has a balance. When calculating your utilization rate, FICO scores will consider any closed account with a balance.

This means that even if you’ve paid off an account entirely, it still has a balance listed on your report; it will be used in calculating your score.

FICO doesn’t consider home equity lines of credit (HELOCs). HELOCs aren’t considered revolving credit accounts by FICO scores; they’ve considered installment loans instead.

As such, they aren’t included in FICO’s calculation of how much revolving debt you have compared to how much of your available credit you’re using. However, VantageScore does consider HELOCs when calculating a score’s utilization rate (as do other non-FICO scores).

The most important thing to understand about credit utilization rates is that they don’t include paid-off, closed accounts in your credit reports.

If you close an account with a $1,000 balance and pay it off ultimately, that amount will still count toward your overall debt-to-credit limit ratio.

FICO calculates only the most recently reported credit limits and balances. It doesn’t consider changing them over time or different versions of information from different bureaus. To see how these affect your score, check out our article on how credit bureau reporting works.

VantageScore may consider your credit utilization rate over time by looking at how much you’ve used your various cards over the last 12 months. However, this is optional for lenders who use VantageScore 3.0 or above.

So What’s the Right Amount of Credit to Use?

So what’s the right amount of credit to use?

There is no single answer to this question.

The right amount of credit to use depends on your personal situation. For example, if you live in a large city and want to buy a home or a car, or if you are starting a business and need financing, it may make sense to have more available credit than if you live in a small town where there aren’t many stores or businesses that accept plastic.

It also depends on how much money you make and how much debt you already have. If you have little or no debt, it might be okay to have more available credit than someone with several loans, from student loans to mortgages.

In general, though, experts recommend keeping your total debt load low — under 30% of your income — so that you don’t end up overextending yourself with credit card payments each month.

This rule applies whether you are carrying a balance or paying off your purchases in full each month. If all of your cards are maxed out, it can negatively affect your score because lenders see this as an indication that you may be unable to pay back the money they lend you.

Next Steps

So, now that you know how much credit to use, what’s the next step?

First, you need to make sure you understand your credit score. Your credit score is between 300 and 850, representing the likelihood that you will repay your debts.

The higher your score, the more likely you will repay your debts on time. If your score is below 700, getting approved for a loan or credit card could be difficult.

Next, check out our guide on how to improve your credit score. Improving your credit score can help you obtain better interest rates on loans and other financial products.

FAQs Related How Much of Your Credit Should You Use

How does credit utilization affect your score?

Credit utilization is an essential factor in determining your credit score, according to FICO. The company says that it considers the ratio of available credit you have used to total available credit on all your accounts when calculating your score.

So if you have a $1,000 balance on a card with a $5,000 limit, you’re using 20 percent of your available credit — which could be good or bad credit.

If you’re using less than 30 percent of your available credit, you’ll get a boost in your score — up to 50 points, according to FICO. Using more than 30 percent of your available credit will hurt your score by 10 points or more.

What is a good credit utilization ratio?

A credit utilization ratio is the amount of your credit card limit that you’re using. It’s expressed as a percentage, so if you have a $5,000 limit and owe $2,000, your ratio would be 40%.

A high utilization ratio can negatively impact your credit score. A low utilization ratio is suitable for your score because it shows lenders that you do not risk defaulting on payments.

Most experts recommend keeping your balance below 30% of your available credit limit, but there’s no hard-and-fast rule about what constitutes “low.”

If you’re planning to apply for a new loan or credit card in the near future, keep your debt under 20% or 25% of your total available credit at all times.

Why Does Your Credit Utilization Ratio Matter?

Credit card companies like to see low credit card balances because it indicates that you’re not maxing out your cards and running up debt.

That’s why they ask for this information when calculating your FICO score: 

A high balance-to-limit ratio can indicate that you’re likely to miss payments or carry an unpaid balance — which could lead to late fees and interest charges — while a low balance-to-limit ratio shows that you’re being responsible with how much money is available to borrow.

What is a poor credit utilization ratio?

A poor credit utilization ratio is anything below 30%. This means you use less than 30% of your available credit. You may have heard that you should only use 10% or 15% of your available credit, but the truth is that no magic number will always be correct for you.

A lower number can help you avoid paying interest on any balances you carry over from month to month. Still, it also means that your credit scores can suffer if they’re not getting enough information about how responsible you are with money in general.

If you’re trying to decide whether or not to make an additional purchase, don’t think about whether or not it will put you over your limit on any cards — think about whether or not it will put you under the 30% mark on all cards combined.

Should I carry a balance from month to month to improve my credit score?

Credit utilization is a big factor in your credit score, but it’s not the only one.

If you have a lot of available credit and use only a tiny amount, that’s good. But if you use too much, that’s bad — and can hurt your score. Credit scoring formulas want to see that you’re using less than 30 percent of your available credit on average.

However, many other factors in credit scoring models affect how lenders view your financial picture — and they’re all critical in determining whether or not they’ll extend credit to you when you need it.

The truth is that carrying a balance from month to month won’t help your score unless you carry a ratio below 30 percent of your total available credit limit.

And even then, other factors could cause problems paying off those balances quickly enough to avoid interest charges or fees.

Why does using too much credit hurt my score?

Credit utilization is a percentage that shows the amount of your credit that you are using. The higher your credit utilization, the lower your score.

The credit scoring system was created to judge whether you have a history of managing your credit responsibly or not.

If you’re using a lot of your available credit, it shows that you’re using more than what’s recommended as an amount of credit to use in relation to the total amount of available credit.

Here are some examples:

If you have $10,000 in available credit and use $4,000, that leaves $6,000 open for future use. If you charge another $4,000 to this same card, only $2,000 will be left for future use — making your ratio 50 percent ($6K/$10K).

This is good because half of your credit is available for future purchases. But if you charge another $5K on top of this total amount (making your total balance $15K), then only $5K will be left after paying off all charges — making this a 100 percent utilization ratio (100%/15K).

Will paying down my credit cards hurt my score?

The short answer is yes — paying down debt on one card will help your score. But there’s more to the story.

How does paying down debt affect my score?

Paying down debt on one card might help your score slightly, but it won’t make a huge difference. The key is how much debt you have on other accounts — mainly revolving accounts such as credit cards.

Final Thoughts On How Much of Your Credit Should You Use?

Ultimately, it’s a personal preference. There’s no right or wrong answer regarding how much of your credit you should use.

But what matters most is that you always keep your credit utilization low, no matter your limit, and don’t apply for many new credits at once.

While it might be tempting to do so, in the end, using up all of your credit is usually bad for your credit score.

About the author

Nikhil Goswami

Nikhil Goswami is an experienced editor and proofreader who has held their impression on the industry for 2 years now. Their ability to work above and beyond brings only the best foot forward. Nikhil Goswami has a wealth of experience...
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