Credit utilization is the ratio of your credit card balances to your credit limits. It's the second most important factor in your FICO score after payment history. Here's what most people get wrong about it.
The Calculation
Utilization is calculated two ways: per-card and in aggregate. If you have a card with a $5,000 limit and a $2,500 balance, that card has 50% utilization. If you have three cards with $15,000 total limit and $6,000 total balance, your aggregate utilization is 40%. Both the per-card and aggregate numbers affect your score.
The Target Number
The conventional wisdom says keep utilization below 30%. The reality: below 10% is optimal for the highest scores. People with exceptional credit scores (800+) typically carry 5-7% utilization on average. This doesn't mean you should avoid using credit — it means you should pay balances down before the reporting date.
When Utilization Is Reported
Credit card companies report your balance to the bureaus once per month — usually on your statement closing date, not your due date. Your score reflects the balance on that date, not after you pay the bill. To improve utilization before a major credit application, pay your balance down before the statement closes.
The Limit-Increase Strategy
Requesting a credit limit increase reduces utilization mathematically (same balance, higher limit). This can improve your score without reducing debt, as long as you don't then charge up to the new limit. Most issuers allow a limit increase request online, often with a soft pull that doesn't affect your score.
Prioritizing Payoff for Score Impact
If your goal includes improving your credit score alongside payoff (for a mortgage application, for example), prioritize paying down the card with the highest utilization percentage first rather than the highest rate. The score improvement may justify the small mathematical cost vs. pure avalanche.