Credit Utilization Explained

Credit utilization — the percentage of your available credit that you're using — is the second most important factor in your credit score, accounting for about 30% of your FICO score. Understanding it helps you make smarter decisions about which cards to pay first.

How Utilization Is Calculated

Divide your total credit card balances by your total credit limits. If you have $8,000 in balances across cards with a combined limit of $20,000, your utilization is 40%. Both overall utilization and per-card utilization matter. Having one maxed-out card and three empty ones still hurts your score.

The 30% Threshold

Financial experts recommend keeping utilization below 30%, with below 10% being ideal. But there's no cliff at 30% — utilization is a sliding scale. Every percentage point reduction helps your score. Going from 80% to 50% will have a bigger impact than going from 20% to 10%.

Why Utilization Matters for Consolidation

When you consolidate credit card debt with a HELOC or personal loan, your credit card balances drop to zero while your credit limits remain unchanged. This can cause a dramatic improvement in your credit score — often 30-50 points — because your utilization drops from high to zero on revolving accounts.

Strategic Utilization Management

When paying off multiple cards, consider paying down the card closest to its limit first to get the biggest utilization improvement per dollar. Keep paid-off cards open (don't close them) to maintain your total available credit. Report your lower balances to the credit bureaus by making payments before the statement closing date.