How Does Credit Utilization Scoring Work?

Credit Utilization

If you are considering how to improve your credit score or if you simply want more information about how credit scores are calculated, chances are you have come across the term credit utilization. The reason for this is because the credit utilization ratio used by credit scoring companies accounts for 30 percent of your overall credit score.

If you are looking to increase your FICO credit score, it is important to pay attention the amount of debt you have. The credit card utilization ratio, which refers to the amount of money that you have borrowed in comparison to how much you have in your credit limit. This is one of the most important elements of your credit score.

Example of Utilization Rate

Factors That Affect Your Credit Score

Credit scores are used by banks and other lenders in order to determine the risk of lending money to an individual. The FICO score is perhaps the most popular score to use by lenders. This means that the higher that your FICO score is the better your chances of being approved for loans and other lines of credit that offer a lower interest rate with higher credit limits.

There are five factors that FICO uses in order to calculate your credit score. These are:


  • Payment history
  • Credit utilization ratio
  • ​Length of your credit history
  • ​Amount of new credit that you have
  • Mix of types of credit that you have

Weight is given to each of these factors when determining your score and as mentioned credit utilization makes up 30 percent of your FICO score, which makes it one of the most important factors for a borrower to understand.

Levels Of Debt Matter

When you are borrowing money it is important to be careful about the amount of debt you are carrying if you wish to obtain a high credit score. Credit scores through FICO range from 300 to 850. The higher a person’s score, the more likely they are to repay their loans.

The reason that debt levels are considered so important is because these levels tend to predict future credit performances. A person who carries a high balance on several cards may find it difficult to make their monthly payments on time.

Credit Plan Revolving

Essentially, taking on a large amount of debt makes it much more likely that you will not be able to pay off your lenders. As the balances on your cards increase so does the likelihood of having a difficult time making a payment. While having some debt does not automatically place someone in a higher risk category, it can be an indicator of some risk.

Components Of Credit Utilization

There are six subcomponents that are used in order to determine credit utilization.

  • 1. Amount of debt owed
  • 2. Number of accounts that have outstanding debt
  • ​3. Amount of debt that is owed for each individual account
  • ​4. Lack of some types of loans in specific cases
  • 5. Percentage of revolving credit lines
  • 6. Amount of money owed for installment loans such as a mortgage.

When it comes to determining credit utilization, it is the amount of debt owed compared to the amount of credit available that is crucial. While it may seem like getting this number would be complicated, it really is simple math.

For example, if you have 3 credit cards that each have a $1000 limit, your amount of credit is $3000. If you have a $100 balance on each of the cards your debt is $300. This means that your credit utilization is ten percent.

While this all seems simple enough, calculating your credit utilization score is a bit trickier than this. The reason is that FICO does not consider all accounts to be equal. A revolving balance form of credit such as retail and credit cards often carry more significance than installment debt such as student loans, mortgages, or auto loans.

Bi Monthly Payments

This means that when it comes to the category of amounts owed, credit cards are extremely important for obtaining a high FICO score. Credit cards can also cause the most damage to your score.

Perfect Your Credit Utilization

In order to improve your credit utilization score the first step will be to take note of how much credit that you have available. Next, you will want to start paying down your balances as quickly as you possibly can.

If you are a good customer, you may request a credit line increase. This can help improve your overall credit utilization as well.

30 %
Utilization Rate

When researching credit utilization you may have read that you should keep your credit utilization below 30 percent. While this is a good goal to keep in mind, there is no magic number that will automatically increase or decrease your credit score. The best rule to live by is that the lower your utilization score the better.

For individuals who only have a single account, keeping credit utilization down can be tough. If you have a single card with a thousand dollar limit, putting just $300 on the card will put you at the 30 percent. If you max out a card by using up the entire line of credit, you can expect your score to drop anywhere from ten to 45 points.


When it comes down to it, your credit utilization score is simply a balancing act. You need to make sure that you have enough revolving credit open in order to improve your score.

It is possible to achieve a high FICO score by simply using a few different account types, paying all of your bills on time, and keeping your balances on the cards that you have low. If you do all of these things you are well on your way to improving your credit utilization and thus improving your credit score overall.

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