Your credit card utilization factors into your credit score and is considered by potential lenders. But what defines a good credit card utilization ratio?

Who likes pie? Well everybody does, of course. But what if we were to say a certain percentage of your pie was so important you needed to take gentle care of it at all times? That’d be a bit weird right? And yet it might just be what you need to do to ensure your credit score doesn’t get trashed like a pie to the face (maybe I’m losing track of the pie metaphor here, but you get the idea).

Although the major credit reporting agencies don’t share with us every measure when it comes to what will hurt and help your credit, one important thing has come out over time: your debt-to-credit ratio, also known as your credit utilization ratio.

So What’s a Good Credit Card Utilization?

Nobody wants to float around with $100,000 in credit card debt, but in one of those awesome catch-22 scenarios, having a credit card balance can actually help you maintain or even improve your credit. But wait! That does not mean you want to carry that balance from month to month. No, instead you want to build a history of making charges on your card and then paying those charges off in full at the end of every billing cycle. This builds good credit history.

Paying off your balance at the end of every month is always the best option. But if you, like many other Americans, have to carry a balance from month to month, then you should work to get your balances — and the total amount of credit you’re utilizing — down to just 30% or lower. (This is where taking care of your pie comes back into play.)

Let Us Explain the Math Behind This

While many credit experts warn credit card carriers to keep your credit utilization ratio at or below 30%, it isn’t a rule that’s strictly followed by the bureaus. It’s widely known, however, that the lower your utilization ratio, the better your credit score, so for many people, 30% (or lower) could be a great number to keep in mind.

If you’d like to try this with your own personal finances, your goal is to ensure that the amount of debt that you have on your credit cards is no more than 30% of the total available credit that you have at your disposal. To give the easy math version, if you have $10,000 in available credit, you don’t want to ring up more than $3,000 in credit card bills.

To take things further, know that this 30% number applies to the sum of any and all credit cards you have. Let’s throw it all into a chart for an example:

Amount Owed

Available Credit

$514.00

$1000.00

$890.00

$900.00

$366.00

$4000.00

Totals

$1770.00

$5900.00

Because the total amount owed ($1,770) is 30% of the total available credit ($5,900), we’re good to go.

It’s Tricky, But You Can Handle It

So what’s the catch? The game you’re playing is a balancing act. On the one hand, you don’t want your debt-to-income ratio to go too far above 30%, but you also don’t want it to dip too low. If you don’t use any of your available credit, that can hurt you as well. That means you want your debt-to-income ratio to stay fairly consistent, and that can be tricky. If a credit card raises your available credit for example, you may have to spend more to keep your debt-to-income ratio in the same happy zone.

What makes this all the more important is that the amount you owe on your accounts determines 30% of a FICO® Score (there’s that 30% of the pie thing again), which can wildly swing your score one direction or the other. And since that score determines so much of your financial future, it’s important to keep it in check.

Just Learn to Keep Things in the Butter Zone

So how do you ensure that you’re keeping your debt-to-credit ratio in the butter zone? One way is to track things with a spreadsheet. Enter in your available credit, the current balance and have the document work the magic for you to show where your percentages sit.

If you’re above 30%, there’s a pretty easy way to figure out how much you need to have: take your total available credit and multiply it by 0.30. If you have four credit cards that total $13,000 in available credit, then the most that you should have in credit card debt is $3,900, which is 30%.

It’s not a ton of fun, and accounting is rarely a glamorous pastime, but it’s important to maintain. You may not want a mortgage or a car loan today, but someday you might, and when you do, you’ll want all of that credit paperwork to go through clean and easy — as easy as pie, you might say.

Written by Kevin Whipps

Participation Pays Off: Are you actively working on improving your credit card utilization ratio?

5 Responses to This Could Be Your Magic Number for Credit Card Utilization

  1. Mike says:

    I’m curious, do auto loans factor into the credit utilization / available credit ratio?

  2. Adrienne says:

    What about education loans? Do they count?

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