Percentage of Credit Card Balance Vs. Credit Limit

The percentage of your total credit limit that you are using at any given time is one factor used to calculate your credit score. Your credit utilization ratio is given a substantial amount of weight in your credit score, second only to your history of paying bills on time. To get the best credit score possible, keep your credit utilization ratio low.

What Is Credit Utilization?

Your credit utilization ratio is an important factor in determining your credit score. Each of the three major credit bureaus -- Experian, Equifax and TransUnion -- has its own way of scoring. However, your FICO score, a number calculated using a method devised by Fair Isaac Corporation, is what lenders use most when determining whether to approve a loan application. The credit bureaus' scores are all based on the FICO model. Your credit card balance relative to your available credit limit accounts for approximately 30 percent of the FICO score. That credit utilization ratio, along with timely payments of debts due, make up 65 percent of your total score. The MyFico website reports that more than 50 percent of credit card users keep their charges at less than 30 percent of their available limits, with only one out of seven having debts amounting to more than 80 percent of their limit.

Keep It Low

Financial experts have differing opinions on what constitutes a low credit utilization ratio. Typically, it's between 10 and 30 percent. The National Foundation of Credit Counseling (NFCC) suggests never using more than 30 percent of your available credit. However, the lower you keep your credit utilization ratio, the more positively this affects your credit rating.

A Simple Formula

To make sure your credit utilization ratio is within acceptable limits, simply divide the balance you owe by your available limit. For example, if you charge a total of $200 on a credit card with a credit limit of $1,200, you've used 17 percent of your limit. This puts your credit utilization ratio within acceptable limits. However, if you have a $900 balance, you've used 75 percent of your available credit -- and this negatively impacts your credit score.

Helpful Tips

One of the worst things you can do, other than maxing out your credit cards, is to seek out more credit, according to the NFCC. Not only does this put you deeper into debt, but applying for more credit cards also negatively affects your credit rating. The NFCC recommends spending no more than 20 percent of your income on outstanding bills and loans, including school loans and automobile payments. You can reduce outstanding balances by doubling your minimum payment each month, and this also saves you from paying exorbitant interest.