Revolving utilization is a big part of your credit score: 30% to be exact. There are certain accounts on your credit report that contribute to it while others don’t. There are also ways you can reduce your utilization rate and improve your credit score. 

In this article, we’ll cover what revolving utilization is, how to improve it, and how it impacts your credit score.

What Is Revolving Utilization?

Revolving utilization goes by a few names–credit utilization rate, debt usage, and debt utilization. It compares your total revolving credit limits to your total revolving balances. It’s also the second largest factor in your credit. 

In addition to being a large component of credit scoring models, it’s also a metric that lenders use to determine your capacity for more debt. So if your revolving utilization is too high when applying for a new credit card, you might see a lower credit limit or even a flat-out denial. 

The calculation to find it is pretty simple. Just divide your total credit balance by your total credit limit. For example, if you have several credit cards with a total credit limit of $40,000 and your balance across all of the credit cards is $10,000, you would have a revolving utilization of 25%. 

This only applies to revolving accounts though. Things like credit cards or lines of credit. The amounts owed on installment accounts such as student loans, mortgages, car loans, or personal loans don’t contribute to your credit utilization ratio.

What Is A Good Revolving Utilization Rate?

Finding the best revolving utilization rate is almost like the tale of Goldilocks. You don’t want it to be too high or too low. According to credit experts, the ideal credit utilization ratio is 30% and below. Going higher than 30% can drop your credit score significantly. 

However, you shouldn’t drop it to zero either. Find the utilization rate that’s just right for you. People with excellent credit tend to keep their revolving utilization rate at 10% and under without hitting zero percent. Because sitting at zero also knocks your credit score by up to 20 points. 

Why wouldn’t you want to have a 0% utilization rate? If everything is paid off then you’re good, right? Not really. Because then you’re not using your credit at all. Using it in a controlled manner demonstrates more responsibility when it comes to the credit bureaus. 

How It Affects Your Credit Score

It’s one of the biggest factors in your credit score, second only to your payment history. So if you’re constantly using your revolving credit and paying it down, you’ll likely see your credit score fluctuate alongside your balances. 

Anything you purchase with your credit cards or other revolving credit accounts has a direct impact on your credit utilization rate. When your credit utilization ratio is too high, you’ll have a harder time getting approved for new credit accounts. 

If you bring your utilization ratio down to zero, you’ll still be able to qualify for new credit, but you’ll lose up to 20 points from your score.

How To Improve Your Revolving Utilization Rate

The overarching theme to improving your credit utilization rate is to pay down your debts as much as possible. This makes it sound simple, but it may take time and a thorough plan.

Pay Down Debt

If you’re ready to make a dent in your debt, there are several strategies you can use to pay down debt quickly and effectively. 

You may want to pay extra towards a higher balance card while making minimum payments on the others. Once that card is paid off, you transfer that payment to the next highest card. This aggressive strategy is also known as the avalanche method. 

Another way to tackle it is to start from the bottom up. Paying off your smallest debt while making minimum payments to other cards. Once that debt is paid, transfer the payment to a slightly larger debt. This is the snowball method.

Increase Your Credit Limit

Requesting a credit limit increase from your credit card issuer is another solution that can boost your credit score by a few points. Depending on the credit card company, they might not do a hard inquiry when you request the increase, but you should ask to be sure. 

Getting a higher credit limit on a card with a high utilization ratio increases your available credit and improves your overall utilization ratio. The key to making this work is not using the extra available credit. 

Balance Transfer

If you have high-interest revolving debt, it can be helpful to do a balance transfer to a different credit card. At any given time, there are several credit card companies offering balance transfer promotions for new credit card holders with good credit scores.

This is most effective when you take advantage of 0% APR promotions for a certain length of time. Typically this involves paying a balance transfer fee to the new card to get started. 

Once you transfer the balance from the old credit card to the new one, it’s best to stop using the old card so you can boost your credit utilization rate. Just don’t close it!

Consolidate Revolving Debts

Making payments on revolving debts can sometimes feel like there’s no end in sight because of high-interest rates. To find some reprieve, consider consolidating your revolving payments into an installment loan. 

A personal loan can be used to pay off credit card balances at a much lower interest rate which may even speed up how long it takes to pay off your total credit card debt. 

If you own a home, you also have the option of leveraging the equity in your home with a home equity installment loan. These often come with interest rates that are extremely low since it uses your house as collateral. 

Keep Old Cards Open

When you start paying off credit card debt, it’s tempting to close down the old cards you haven’t used in a while. Doing this actually has the opposite effect on your credit utilization rate and your credit score. By closing out an old credit card, you’re losing access to that available credit. 

Less available credit means a higher credit card utilization ratio. Unless you’re paying a high annual fee to keep the card open, it’s best to keep it open without using it to keep your credit history pristine. 

Overall, maintaining a healthy credit utilization ratio is a major factor in earning good credit. It’s a measure of your responsibility in managing your credit card accounts. It also tells potential lenders how much they can comfortably approve you for. 

Use tactics like paying down your debt, increasing credit limits, keeping old cards open, and consolidating debts to bring your utilization ratio to a manageable level. By being mindful of your credit utilization ratio, you can earn excellent credit and escape the hassle of credit card debt.

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