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The Points Guy believes that credit cards can transform lives, helping you leverage everyday spending for cash back or travel experiences that might otherwise be out of reach. That's why we publish a variety of editorial content and card comparisons: to help you find a great card to turn your goals into reality.
Our site may earn compensation when a customer clicks on a link, when an application is approved, or when an account is opened with our partners, and this may impact how or where these products appear. While we don't cover all available credit cards, our editorial team creates and maintains all of the analysis of these cards, and our content is not influenced nor subject to review by any credit card company, bank or partner prior to (or after) publication. Please view our advertising policy and product review methodology for more information.
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Credit utilization ratio: What it is and how it affects your credit score
Jennifer is a contributing writer to The Points Guy where she focuses on family travel. She is also the founder of Deals We Like where she helps her readers travel on a deal.
When Ryan worked as a TPG credit cards writer, he oversaw refreshes of card reviews and card offer stories. He enjoyed racking up cash back and helping readers maximize their points and miles for their next big trip.
also contributed to this story
November 6, 2024 • 9 min read
The cards we feature here are from partners who compensate us when you are approved through our site, and this may impact how or where these products appear. We don't cover all available credit cards, but our analysis, reviews, and opinions are entirely from our editorial team. Terms apply to the offers listed on this page. Please view our advertising policy and product review methodology for more information.Editorial disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
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Quick summary
Credit utilization ratio is the percentage of your total available revolving credit that you are currently using, and it is a key factor in your credit score.
Maintaining a low utilization ratio, ideally below 30%, can help improve your credit score and increase your chances of loan and credit approval.
Canceling a credit card can increase your utilization ratio and potentially lower your credit score, even if your total debt remains unchanged.
Options to avoid negative impacts include shifting credit limits between cards, downgrading to a different product, or keeping no-fee cards open with occasional use.
What to consider
Credit utilization is calculated across all revolving accounts, not just individual cards.
Transferring credit limits or downgrading cards may have restrictions and could affect future eligibility for new products or bonuses.
Issuers may close inactive accounts, so periodic activity is recommended to keep cards open.
What you'll miss from the article
Detailed strategies for managing credit utilization and minimizing score impacts when closing or downgrading cards.
Generated by AI with support from our editorial team.
Update: Some offers mentioned below are no longer available. View the current offers here.
When it comes to personal finance (including how to get the best credit cards), your credit score plays a large role. Creditors use it as a barometer for your trustworthiness as a borrower.
One of the main factors in determining your score is credit utilization, a term not everyone is familiar with. Let’s look at your credit utilization ratio and how you can maintain a low ratio to improve your credit score.
The term “credit utilization ratio” describes the relationship between your balances and total available credit across revolving accounts (such as credit cards). It’s the percentage of your credit limits that you are using, as reported by the three credit bureaus. Credit utilization is sometimes known as your “balance-to-limit ratio” as well as your “debt-to-credit ratio” — but can also appear as “amounts owed.”
You can calculate your credit utilization with this simple formula:
Total outstanding credit card balances ÷ total credit limits = credit utilization ratio.
Note that this will get you a number between zero and one — often multiplied by 100 to be expressed as a percentage.
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Remember, though, that should include all of your revolving credit accounts. So, if you have four credit cards, you’ll want to add up your balances and the total credit limits across all cards.
For example, let’s say you have a combined credit limit of $12,000 across two different cards, and your credit report shows an account balance of $6,000 spread across those two cards. In this case, your credit utilization ratio is 50% ($6,000 ÷ $12,000 = 0.5 X 100 = 50%). In other words, you’re using 50% of the credit limit on your account.
You can also calculate your per-card ratio using the same formula but using that particular card’s balance and credit limit. While your individual cards' credit ratios are important, the most crucial ratio is the ratio of your overall balances to the total credit you have at your disposal.
Credit utilization is one of the more important factors determining your credit score. Depending on which scoring model is used, it could make up as much as 30% of your score (as it does with your FICO score). The only other factor with that much weight is your payment history.
FICO
Why does it matter so much?
Well, from a creditor’s perspective, it can show whether or not you are doing a good job of managing your credit cards and whether or not you are overspending. If you consistently pay off your balances and do not REACH your full credit limit, that tells creditors (like card issuers) that you are a low-risk customer.
The lower your risk, the more likely you’ll be approved for a card and any additional credit needs, such as a mortgage and auto loans. In addition, higher scores may unlock better terms from lenders (like a lower mortgage interest rate), so paying close attention to your utilization can save you real money.
What is a good credit utilization ratio?
Credit scoring models reward you when you keep your credit card utilization rate low. If you’re looking for a way to boost your credit scores, paying down your credit card balances (and therefore lowering your utilization ratio) is often one of the most effective ways to accomplish that goal.
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Generally speaking, you should keep your total credit utilization ratio below 30%. This is another reason we recommend paying off your balances in full each month. It’s the best way to avoid interest payments and helps keep your credit utilization ratio as low as possible.
If your credit card balance is higher than usual, the sooner you pay down those balances — even if it is before your monthly statement closes — the better off you’ll be regarding your credit utilization ratio.
Why canceling a card could hurt your utilization ratio
When you cancel a credit card, you’re potentially hurting your score in two ways. First, you reduce the average length of accounts, especially if you’ve had the card for a long time. Second, you’re potentially increasing your credit utilization ratio.
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Let’s say you close a credit card with a $0 balance and a $15,000 credit limit but still have two other credit cards:
Card No. 1 has a $3,000 balance and a $10,000 credit limit
Card No. 2 has a $3,000 balance and a $10,000 credit limit
With all three cards, your credit utilization ratio is 17.14% ($6,000 ÷ $35,000). However, if you cancel that card, the denominator of that equation (your total available credit) decreases significantly. Meanwhile, the numerator (your total outstanding balance) remains the same.
Canceling that card with the $15,000 limit will increase your aggregate utilization ratio to 30%.
Because of that, your credit scores may drop, even though your credit card debt is the same amount as before.
Ultimately, the extent to which a credit card closure hurts your credit score largely depends on how many other accounts you have open and how much you use them. The available credit on the canceled card can also affect this equation. However, removing at least some of your available lines of credit will almost always result in a credit score drop.
To avoid decreasing your overall credit limit — and thus increasing your credit utilization ratio — you have a few options when you want to cancel a card.
First off, you can shift credit from one credit card to another. This only works if you have multiple credit cards within the same bank. Let’s say you have a $10,000 credit limit with a Chase personal card, but you also have a few other Chase personal credit cards in your wallet. Before canceling the card, you can call Chase to transfer your credit limit from the card you want to cancel to another card — or cards — in your account.
This will keep your credit tied to your account, thus not affecting your credit utilization score. Once the credit is relocated from one account to another — sometimes taking up to 24 hours — you can cancel the card.
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Remember, though, that each bank has a different set of rules. Typically, there is a minimum amount of credit that you’ll need to keep tied to the card — typically between $1,000 to $5,000, depending on the bank — so you are still losing some credit, but not a significant amount. Additionally, shifting credit doesn’t require a hard credit pull unless the new card’s limit exceeds a preset number with the bank.
Another way to not lose your card’s credit is to request a downgrade from your issuer to a different product that doesn’t charge an annual fee. This will keep your credit with the new card and have zero impact on your credit utilization score. However, downgrading a card could exclude you from applying for a new card in the future and getting a welcome offer on that particular card.
And if the particular card you want to close is a no-annual-fee credit card, you can keep it open and tucked away in your sock drawer. It doesn’t hurt to keep it open, but it requires you to keep an eye on the account to ensure no fraudulent activity. We also recommend making at least a few purchases yearly to avoid the issuer proactively closing your account due to inactivity.
If you want to cancel a card while applying for a new one, the best practice is to apply for the new one before canceling the old one. Your existing credit line will still be factored into your score, and your utilization ratio will remain low while your application is being considered.
Although it is easy to forget about your credit score when deciding to apply for a new card with an enticing welcome bonus, it is incredibly important to keep in mind — especially your credit utilization ratio.
Since debt makes up the bulk of your score, your credit utilization should always be considered when canceling and applying for new credit cards.
Having a low credit utilization ratio will only help your credit score, which can lead to more favorable credit card, loan and mortgage applications in the future.
By commenting, you agree to our Community Guidelines to help create a positive space for conversation. The responses below are not provided or commissioned by the bank advertiser, our partners, or The Points Guy (“TPG”). They have not been reviewed, approved, or otherwise endorsed by any of these parties. All responses are submitted by individual contributors, and neither the bank advertiser, our partners, nor TPG are responsible for ensuring that all posts and/or questions are answered.
