Understanding Credit Utilization: The Secret to a Higher Score

Credit utilization is one of the most misunderstood aspects of credit scoring, yet it's the second-most important factor affecting your score (30% of your FICO score). The good news? It's also one of the easiest factors to improve, with changes reflected in your score within weeks.

This guide explains exactly what credit utilization is, why it matters, and how to optimize it for the highest possible credit score.

What is Credit Utilization?

Credit utilization is the percentage of your available credit that you're currently using. It's calculated by dividing your credit card balances by your credit limits.

Formula: (Total Credit Card Balances ÷ Total Credit Limits) × 100 = Utilization Rate

Example:

• Credit Card 1: $1,500 balance, $5,000 limit
• Credit Card 2: $800 balance, $3,000 limit
• Total balances: $2,300
• Total limits: $8,000
• Utilization rate: ($2,300 ÷ $8,000) × 100 = 28.75%

Why Credit Utilization Matters

Lenders use credit utilization as a proxy for financial stress. High utilization suggests you're relying heavily on credit, which indicates higher risk of default.

What the numbers mean:

• 0-10%: Excellent (optimal range)
• 10-30%: Good (acceptable range)
• 30-50%: Fair (starting to hurt your score)
• 50-75%: Poor (significantly damaging)
• 75-100%: Very Poor (severely damaging)

Impact on your score: Reducing utilization from 80% to 30% can increase your credit score by 50-100 points.

Per-Card vs. Overall Utilization

Credit scoring models look at utilization two ways:

Overall Utilization

This is your total balances divided by total limits across all cards.

Example:

• Card 1: $1,000 balance / $5,000 limit = 20%
• Card 2: $500 balance / $3,000 limit = 16.67%
• Overall: $1,500 / $8,000 = 18.75%

Per-Card Utilization

Each card's individual utilization also matters.

Why this matters: Having one card maxed out (100% utilization) hurts your score even if your overall utilization is low.

Best practice: Keep every individual card below 30% utilization, ideally below 10%.

The 30% Rule (And Why 10% is Better)

Financial experts commonly recommend keeping utilization below 30%. This is good advice, but there's more to the story.

Why 30%?

Research shows that credit scores start declining noticeably once utilization exceeds 30%. This threshold is where lenders begin viewing you as a higher risk.

Why 10% is Optimal

However, data shows that people with the highest credit scores (800+) typically have utilization below 10%.

Score comparison:

• 0-10% utilization: Average score 780-820
• 10-30% utilization: Average score 720-780
• 30-50% utilization: Average score 650-720
• 50%+ utilization: Average score below 650

Our recommendation: Aim for under 10% utilization for maximum credit score benefit.

How to Calculate Your Utilization

Step 1: List All Your Credit Cards

Create a spreadsheet with:

• Card name
• Current balance
• Credit limit
• Individual utilization rate

Step 2: Calculate Individual Utilization

For each card: (Balance ÷ Limit) × 100

Example:

• Balance: $1,200
• Limit: $5,000
• Utilization: ($1,200 ÷ $5,000) × 100 = 24%

Step 3: Calculate Overall Utilization

Add up all balances and all limits, then divide:

(Total Balances ÷ Total Limits) × 100

Step 4: Identify Problem Areas

Flag any cards with:

• Individual utilization over 30%
• Balances close to the limit
• Maxed out cards

Strategies to Lower Your Utilization

Strategy 1: Pay Down Balances

This is the most direct approach.

Prioritize cards with:

• Highest utilization rates first
• Highest interest rates
• Smallest balances (for quick wins)

Payment strategies:

Avalanche method: Pay minimums on all cards, put extra money toward the highest interest rate card. Saves the most money.

Snowball method: Pay minimums on all cards, put extra money toward the smallest balance. Provides psychological wins.

Utilization-focused method: Pay minimums on all cards, put extra money toward the card with the highest utilization rate. Improves credit score fastest.

Our recommendation: Use the utilization-focused method if improving your credit score is the priority.

Strategy 2: Make Multiple Payments Per Month

Credit card companies report your balance to credit bureaus once per month, typically on your statement closing date.

The trick: Make payments before your statement closes to lower the reported balance.

Example:

• Credit limit: $5,000
• You charge $2,000 per month
• If you pay $1,500 before statement closes, only $500 is reported
• Utilization: 10% instead of 40%

How to implement:

• Find out your statement closing date (call your card issuer)
• Make a payment 3-5 days before that date
• Pay the remaining balance by the due date to avoid interest

This strategy lets you use your cards heavily while maintaining low reported utilization.

Strategy 3: Request Credit Limit Increases

Increasing your credit limit while keeping balances the same automatically lowers your utilization rate.

Example:

• Current: $2,000 balance / $5,000 limit = 40% utilization
• After increase: $2,000 balance / $8,000 limit = 25% utilization

How to request:

• Call your card issuer and request an increase
• Apply online through your account portal
• Mention positive factors (increased income, good payment history)
• Be prepared to provide income information

When to request:

• After 6-12 months of on-time payments
• When your income has increased
• When your credit score has improved

Important: Don't increase your spending! The goal is to lower utilization, not accumulate more debt.

Strategy 4: Open a New Credit Card

Adding a new card increases your total available credit, lowering your overall utilization.

Example:

• Current: $3,000 balance / $10,000 total limits = 30%
• After new card: $3,000 balance / $15,000 total limits = 20%

Pros:

• Immediate increase in available credit
• Lowers overall utilization
• May offer rewards or benefits

Cons:

• Hard inquiry temporarily lowers score (5-10 points)
• Lowers average age of accounts
• Temptation to spend more

Our recommendation: Only open a new card if you have discipline not to increase spending. The utilization benefit can outweigh the inquiry impact if you keep the card at $0 balance.

Strategy 5: Become an Authorized User

Ask a family member with good credit to add you as an authorized user on their oldest, well-managed credit card.

Benefits:

• You inherit their positive payment history
• You benefit from their low utilization
• You don't need to use the card
• No hard inquiry on your credit

Requirements:

• They must have excellent payment history
• Their utilization should be low (under 30%)
• The card issuer must report authorized users to credit bureaus

Risk to them: If you use the card irresponsibly, it affects their credit. Most people don't give you the physical card—you're just listed on the account.

Common Utilization Mistakes

Mistake 1: Paying Off Cards and Closing Them

Closing a credit card reduces your available credit, which increases your utilization rate.

Example:

• Before closing: $2,000 balance / $15,000 limits = 13.3%
• After closing $5,000 limit card: $2,000 balance / $10,000 limits = 20%

What to do instead: Keep old cards open and use them for small purchases occasionally to keep them active.

Mistake 2: Maxing Out One Card While Others Have Low Balances

Even if your overall utilization is low, having one maxed-out card significantly hurts your score.

Example:

• Card 1: $5,000 balance / $5,000 limit = 100%
• Card 2: $500 balance / $5,000 limit = 10%
• Overall: $5,500 / $10,000 = 55%

Better approach: Spread balances across cards to keep each under 30%.

Mistake 3: Only Making Minimum Payments

Minimum payments barely reduce your balance, keeping your utilization high.

Example: $5,000 balance at 18% APR with $150 minimum payment:

• Takes 4.5 years to pay off
• Costs $3,100 in interest
• Keeps utilization high the entire time

Better approach: Pay as much as possible above the minimum to reduce balances faster.

Mistake 4: Not Knowing Your Statement Closing Date

If you pay your balance after the statement closes, the high balance is still reported to credit bureaus.

Solution: Find out your statement closing date and make payments before that date to lower reported balances.

Mistake 5: Using Debit Cards to Avoid Credit Utilization

Debit cards don't build credit history. Using credit cards responsibly (and paying them off) is better for your credit score than avoiding credit altogether.

Best practice: Use credit cards for purchases, pay them off before the statement closes, and enjoy low utilization plus credit building.

Utilization and Different Types of Credit

Credit Cards

Utilization applies to credit cards and affects your score significantly.

Lines of Credit

Personal lines of credit also factor into utilization, though they're weighted slightly differently than credit cards.

Installment Loans (Auto, Mortgage, Personal)

Installment loans don't use utilization in the same way. Instead, credit scoring models look at the ratio of your current balance to the original loan amount.

Example: If you borrowed $20,000 for a car and now owe $15,000, that's 75% of the original amount. This has minimal impact compared to credit card utilization.

Store Cards

Store credit cards (like those from retailers) count toward utilization just like regular credit cards.

How Quickly Does Utilization Affect Your Score?

Good news: Utilization has no memory. Once you lower it, your score improves quickly.

Timeline:

• Week 1-2: Pay down balances
• Week 3-4: Card issuer reports new balance to credit bureaus
• Week 4-5: Credit score updates with new utilization
• Result: Score improvement visible within 30-45 days

This is why utilization is one of the fastest ways to improve your credit score.

Real-Life Example: Sarah's Utilization Optimization

Starting point:

• Card 1: $4,500 balance / $5,000 limit = 90%
• Card 2: $2,800 balance / $3,000 limit = 93%
• Card 3: $1,200 balance / $2,000 limit = 60%
• Overall: $8,500 / $10,000 = 85%
• Credit score: 580

Month 1-2: Aggressive paydown

• Paid $3,000 toward Card 1 (now $1,500 / $5,000 = 30%)
• Paid $1,500 toward Card 2 (now $1,300 / $3,000 = 43%)
• Paid $700 toward Card 3 (now $500 / $2,000 = 25%)
• Overall: $3,300 / $10,000 = 33%
• Credit score: 635 (+55 points)

Month 3: Credit limit increases

• Requested and received increase on Card 1 ($5,000 → $7,000)
• Requested and received increase on Card 2 ($3,000 → $4,000)
• Overall: $3,300 / $13,000 = 25%
• Credit score: 665 (+30 points)

Month 4-6: Maintain low utilization

• Continued paying balances before statement closing dates
• Kept overall utilization under 20%
• All individual cards under 30%
• Final credit score: 695 (+30 points)

Total improvement: 115 points in 6 months, primarily through utilization optimization

Utilization Optimization Checklist

Immediate actions:

• ☐ Calculate your current utilization (overall and per-card)
• ☐ Identify cards with utilization over 30%
• ☐ Find out statement closing dates for all cards
• ☐ Set up automatic minimum payments

Short-term actions (1-3 months):

• ☐ Pay down high-utilization cards aggressively
• ☐ Make payments before statement closing dates
• ☐ Request credit limit increases on cards with good history
• ☐ Become an authorized user on a family member's card (if possible)

Long-term actions (3-6 months):

• ☐ Keep all cards under 30% utilization
• ☐ Aim for under 10% utilization for maximum benefit
• ☐ Keep old cards open (don't close them)
• ☐ Monitor your credit score monthly to track progress

Ready to Optimize Your Utilization?

Credit utilization is one of the most powerful tools for improving your credit score quickly. Unlike payment history (which takes time to build) or credit age (which you can't control), utilization can be optimized within weeks.

Start today by calculating your current utilization and implementing the strategies in this guide. Within 30-60 days, you'll see noticeable improvements in your credit score.

At Canada Auto Approval, we work with customers at all credit levels. Whether you're working on improving your utilization or ready to finance a vehicle with your current credit, we have solutions that work for you.

Get pre-approved in just 3 minutes with no impact to your credit score. Let's help you achieve your financial goals.