What Should My Credit Utilization Be?

Your credit utilization plays a significant role in determining your creditworthiness. Simply put, your credit utilization rate is how much credit you're using out of the total credit you have available to you in your name. So you if you had two credit cards, each with a credit limit of $1,000 (so you have $2,000 in total credit available to you) and you have a total balance of $500, your credit utilization would be 25% ($500 out of $2,000).

Let's take a look at why credit bureaus consider credit utilization to be a crucial factor in determining your credit score and see how to calculate your own ratio. 

What is credit utilization?

Credit utilization is how much of your available credit you’re using at any one time versus how much credit you have available. For example, if you have a limit of $10,000 on a credit card and are carrying a balance of $5,000 your credit utilization ratio would be 50%. In general, experts agree that maintaining a ratio of 30% or below reflects that you’re in healthy shape financially.

Credit utilization is important because it’s a key factor Canada’s two credit bureaus, TransUnion and Equifax, use when assessing your credit score. In fact, it accounts for up to 30% of your overall credit score with only payment history having more of an influence on your score (as it counts for 35% of your score). 

Why does credit utilization matter to credit bureaus? Credit utilization is a crucial factor for credit bureaus in assessing a person’s creditworthiness and financial responsibility because it’s seen as a reliable measure of financial health. If you have a high ratio (i.e. you are getting closer to the maximum lending limits of your credit cards and lines of credit) it can appear that you are taking on too much debt, which could signal impending financial trouble. 

Bureaus see high credit utilization ratios as indicators of heavy reliance on credit, potentially signalling financial strain and raising concerns about your ability to repay future debt. On the other hand, a low utilization ratio signals to credit bureaus that you are skilled at credit management and that you prioritize responsible financial behaviour.

How to figure out your credit utilization ratio?

Clearly, it’s crucial to stay on top of your credit utilization to ensure your ratio is at a healthy level. Monitoring your ratio is actually quite straightforward. Here’s how to figure it out to ensure you keep your score below 30%:

• Add up how much debt you're currently carrying on your credit cards and lines of credit (types of credit known as revolving debt). 

• Then add up your total credit limits.

• Next divide your total balance by your total credit limits. Then multiply the total by 100 to get it as a percentage.

Here’s how it would work with a real-world example. If you have two credit cards with an assigned credit limit each of $2,500 and a line of credit limit of $5,000, your total credit available would come to $10,000. 

Next, let’s say you have a balance on each card and on your line of credit $1,500 each (for a total of $4,500 in debt). 

To calculate your ratio you would do the following:

4,500 / 10,000 = .45 x 100 for a total of 45%. In this example your credit utilization ratio would be 45% which is quite a bit higher than the maximum limit of 30% that credit bureaus want to see.

What is a good credit utilization rate?

A good credit utilization ratio is typically considered to be below 30%. This means you’re using less than 30% of the total credit available to you. This low ratio is a sign to credit bureaus that you manage your credit responsibly and are not taking on too much debt, which could lead to financial difficulties. 

Don’t be too concerned if you sometimes have a ratio above 30%. It's normal for unexpected expenses or financial emergencies to temporarily increase your ratio. The important thing is to keep it below 30% as much as possible because credit bureaus are really on the lookout for consistent responsible financial behaviour. By maintaining a low ratio over time, you show that you manage your credit responsibly, which will positively influence your credit health. 

Tips to manage your credit utilization

Here are some tips to effectively manage your credit utilization:

• Monitor Your Revolving Credit Balances: Make it a habit to regularly review your credit card and line of credit balances to ensure you keep your ratio at 30% or below.

• Pay Balances in Full and On Time: The best way to keep your ratio at a good level is to pay off your balances in full and on time each month. If you tend to miss payment dates, it can be smart to set up alerts so you don’t forget to make a payment. 

• Consider Increasing Your Credit Limit: If you’re sure you won’t be tempted to overspend, ask for a credit limit increase on your existing credit accounts.

• Don’t Close Unused Accounts: Closing unused credit accounts can decrease your total available credit, which, in turn, increases your ratio.