What Is Credit Utilization

Credit utilization is a ratio that compares the balance reported on a revolving credit account with the credit limit on that account. The result is usually expressed as a percentage: a balance of three hundred dollars on a limit of one thousand dollars equals thirty percent utilization on that account. The same math is applied to a group of accounts by adding the reported balances together, adding the limits together, and dividing the first total by the second. This combined figure is often called aggregate or overall utilization, and it can differ from the ratio on any single account.

Only revolving accounts count toward utilization. Credit cards and retail charge accounts with revolving terms are the typical examples. Installment loans, such as auto loans, student loans, and mortgages, have fixed payments and a set payoff schedule rather than a reusable limit, so they are not included in the ratio. A closed revolving account generally has no open limit to divide against, and a charge card that must be paid in full each month may or may not supply a limit that lenders report. Because the accounts included in the calculation vary, two people with similar spending can have different utilization figures.

Utilization appears on credit reports because lenders report balances periodically, usually once a month, along with the account's limit and status. The reporting date is set by the lender and often falls near a statement closing date, which means a balance paid after that date can still appear on the next report update. Each of the national credit reporting companies maintains its own file, and a lender that reports to one company does not necessarily report to all of them, so utilization can differ from report to report.

In widely used scoring models, utilization falls within a category often labeled amounts owed, sometimes described as credit usage. Scoring models read several things at once, including payment history, the length of time accounts have been open, the mix of account types, and recent applications for credit, so the ratio is one input rather than a pass or fail threshold. The major scoring companies do not publish a single cutoff above which utilization is treated as a problem, and no model treats a particular percentage as a guaranteed outcome. Most models read only the most recent reported figures, so utilization is a snapshot of a moment rather than a running total of past balances.

A credit report lists current balances and credit limits for each account, so a reader can reproduce the division for any account or for the file as a whole. Under federal law, the three national credit reporting companies must each provide a free report once every twelve months when it is requested through AnnualCreditReport.com, the site the Federal Trade Commission identifies as the authorized source. A ratio calculated from a report describes what that file contained when the data was reported, not how any lender or scoring model will treat it.