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How Do Credit Utilization Ratios Affect Credit Scores?

June 12th, 2023

How Do Credit Utilization Ratios Affect Credit Scores

Credit scores from FICO and VantageScore, the two most prominent U.S. credit scoring companies, rely on calculations based on a range of data, including payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

The total amount you owe, the number and types of accounts you have, and the amount of money owed compared to how much credit you have available compose the “amounts owed” ratio. One of the ways this figure is calculated is through credit utilization, a measure of how much available credit you’re using as it applies to revolving credit accounts, including credit cards, personal lines of credit and home equity lines of credit. These accounts are separate from mortgages or car loans which have fixed terms for repayment.

Most sources say that no revolving line of credit should be utilized more than 30% at a time, so if you have a credit line limit on a bank card of $5,000, having a balance due above $1,500 on that card will lower your credit scores. New loans that don’t have a payment history can also lower your scores, while small balances or balances that were paid off over time can raise your scores.

To calculate your credit utilization ratio, add up all the balances and then the credit limits you have on all your accounts. Then divide the total of the balances by the total of your credit limits. Multiply the result by 100 to see your percentage.