In this case, your total utilization rate would be 25% -- $6,000 divided by $24,000. Your utilization on Card 3, however, is 50%. Your credit score will suffer if any one card is maxed out or nearly maxed out.
Credit utilization indicates how much room you have for more borrowing. People with the best credit scores tend to have a utilization ratio under 10%. Above that, you should expect to see your score diminish as your utilization goes up.
But you can have good credit with a utilization ratio of 30% or even more if other factors are strong.
To understand this better, here are the factors that affect your FICO® Score according to their weighting, most to least:
- Payment history: 35%
- Utilization ratio: 30%
- Length of credit history: 15%
- New credit accounts (i.e., credit instruments you've recently acquired): 10%
- Credit mix (the variety of your overall credit): 10%
Utilization is the second-most critical component of your credit score, next to payment history, and its weight is nearly equal.
How can I improve my credit utilization?
You can improve your credit utilization three ways:
- Reduce your debt
- Increase your credit limit
- Get a new credit card
Reduce your debt
It's best if you can somehow reduce your debt. Reducing debt will favorably tilt the ratio and also make your overall finances that much stronger. Plus, the newest FICO credit scoring model and VantageScore look favorably on decreasing debt.
Increase your credit limit
Raising your credit limit isn't a particularly daunting task. Although methods vary from issuer to issuer, a few clicks within your account management portal can usually lead you to a limit raise request. You can also typically ask for an increase via phone, or with a written request.
Oftentimes, your issuer will offer a credit increase in exchange for a small piece of information or two. It's common for issuers to bump the limit for cardholders that update their annual income figure, for instance.
It's also worth noting that your account needs to be in good standing to get a limit bump. Issuers won't increase their exposure to you as a lender if you haven't demonstrated you can pay your statements on time or be disciplined about your spending.
Get another credit card
To get approved for another card, you'll generally need to show consistent debt management, a good credit utilization ratio, and a timely, consistent payment history.
Keep in mind that applying for a new card will result in a hard inquiry on your credit report. In some cases, applying for a credit limit increase will do the same thing. So either way, apply sparingly. Each hard inquiry has the potential to reduce your credit score by a few points. Too many hard inquiries could make it hard for you to get credit in the future when you need to apply.
