Taking your financial health into your own hands is empowering at any age, but it’s an extra special feeling when you’re a college student or young worker starting out in life. In your journey towards understanding how spending, saving, and borrowing money works, you may find yourself asking: What is my credit utilization? And in the long run, how can I improve it?

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What is my credit utilization?

Credit utilization, or credit utilization ratio, is the percentage of your credit limit that you’re currently borrowing. For example, if you have a credit card with a $2,500 limit, and you’ve spent $500 of that money that you still have to pay back during the next billing cycle, your credit usage is 20%.Credit utilization ratios factor in credit cards and other revolving credit accounts with credit limits that renew once you pay your balance (like personal lines of credit and home equity lines of credit).

‍Note: Your credit utilization only counts the money you’ve spent on credit and haven’t yet paid back. For example, if you’ve spent $2,000 on your credit card over the last three months, but already paid back $1,500 of that over the last two billing cycles, only $500 of it counts towards your credit usage.

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How do I find my credit utilization?

One way to find your credit utilization is to look at your credit limit. Then, compare that with the amount of money you’re currently borrowing. Then, you divide the amount borrowed by the total amount of credit.

The simple equation looks like this: Credit utilization = Total currently borrowed / Total credit limit

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What is a good credit utilization ratio?

While there is no hard and fast rule about what makes a “good” credit utilization ratio, we do know this: Borrowing too much of your credit limit at once can hurt your credit score. Because of this, most experts recommend keeping your credit usage at or below 30%.For example, if your credit limit is $3,000, you’ll want to keep your monthly credit card usage at or below $900. More importantly, though, make sure you can pay back your monthly statement without carrying a balance into the next month. Unless you have a 0% annual percentage rate deal on your credit card for a certain number of months, your balance will accrue high interest costs, typically in the 20% range.

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My credit utilization on one card is too high. Is that bad?

Credit reporting agencies look at your overall credit utilization. For example, if you have three credit cards, each with a usage rate of 25%, 20%, and 40% respectively, your average credit utilization is 25%. In this case, if your credit utilization on one card is too high, it balances out with the others that are lower.However, it’s important to remember that ratios can swing high easily, so trying to keep each card below the 30% threshold is a helpful rule of thumb. One of the three major credit bureaus Experian weighs credit scores by a number of factors, but credit utilization makes up 30% of that score. Equifax doesn’t say the percentage that credit usage makes up in its scoring rubric, but it is the second-highest priority under payment history. For TransUnion, credit utilization makes up 20% of your score.

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How do I decrease my credit utilization?

There are a few ways to decrease your credit utilization ratio and improve your credit score.

• Increase your credit limits. The quickest way to decrease your credit usage is to increase your credit limits. Say you are currently borrowing $1,000 on a $3,000 credit card, but you request a credit limit increase and receive a new credit limit of $5,000. Your credit utilization ratio automatically goes from 33% to 20% with the next billing cycle.

Credit card companies and others who lend revolving credit are typically happy to give a higher credit limit to folks who have proven themselves with a solid, on-time payment history for a period of time. Just be cautious; with a higher credit limit comes more responsibility to avoid overspending.

• Pay down your credit cards.

If you’re in credit card debt, your payment history and credit usage may be on the line. In this case, it’s important to make a plan to pay down the debt. Debt snowball and debt avalanche methods are two popular options for planning to pay down debt. Here’s a calculator to help you determine the best way to go about either option.

• Get a secured credit card to decrease credit utilization while increasing your credit score.

Secured cards like Firstcard provide a way for you to increase your credit score while simultaneously working to decrease your credit usage on another card. A quarter of all college students already have credit card debt, according to a 2023 survey. We know this is from factors like credit card companies preying on young, inexperienced students as a way to gain more indebted customers.Even college isn’t too early to start remediating your credit score. In fact, the sooner you do this, the easier it will be.

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One step closer to a clear understanding of credit

Figuring out what credit usage means and how it impacts your credit score is a big step. With that, you’re one step closer to having a firm grasp on your overall financial health. Whether through Firstcard, budgeting, or some other method, you have many means of controlling your credit (rather than letting it control you).

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