Revolving utilization, also known as credit utilization or debt-to-credit ratio, refers to the percentage of available credit you’re using on your revolving accounts, such as your business credit cards. It’s a crucial metric that directly impacts your credit scores. Essentially, it shows how responsibly you manage your credit.
So what is revolving utilization, and how can you improve it? Here’s what you need to know.
How Revolving Credit Works
Revolving credit accounts have a “revolving” balance, like credit cards. When you’re approved for a credit card, you receive a credit limit (e.g., $1,000). If you use $200 for purchases, your balance becomes $200, and your remaining credit limit is $800. As you pay off the balance, your available credit “revolves” back to the original limit.
Calculating Revolving Utilization
Your revolving utilization rate compares your credit debt to your total credit limit. To calculate it, divide your balance by your credit limit.
Formula: Revolving Utilization Rate = (Credit Card Balance) / (Credit Limit)
Example: If you have a $2,000 balance on a credit card with a $5,000 limit, your utilization rate is 40%.
The revolving utilization rate you see on your credit score is based on all your accounts. So, if you had a second $5,000 credit card with no balance in addition to the card above, your total credit card utilization rate would be 20%.
Your utilization rate is based on revolving credit. So, credit cards and other lines of credit count toward your utilization rate; other types of debt, like mortgages and loans, don’t. Tracking those debts is important for financing decisions, but they don’t factor into your utilization rate.
What Is a Good Revolving Utilization Rate?
All major credit bureaus (Equifax, Experian, and TransUnion) recommend that you keep your revolving utilization rate below 30%. The lower your rate, the better.
Here are a few ways you can reduce your rate.
- If you can, pay off your credit card balance every month. The less you owe, the lower your utilization rate. You’ll also avoid interest on your balance and boost your credit.
- If you can’t pay down your balance every month, try increasing your overall credit limit. Ask your credit card company to raise the limit on your existing account or open another line of credit.
- If you have old credit cards you no longer use, keep them open. They’ll improve your utilization rate if they don’t carry a balance.
The Bottom Line
Responsible credit management involves keeping your revolving utilization in check. By understanding and managing it wisely, you can improve your credit health and financial well-being.
Remember, maintaining a healthy credit score opens doors to better loan terms, lower interest rates, and financial stability.
