Using The Credit Utilization Ratio To Increase Your Credit Score

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  • Using The Credit Utilization Ratio To Increase Your Credit Score
Author: Joseph Reinke, CFA

I’ve had the honor of doing our student loan workshop for 100+ universities throughout the country.  One common question that I consistently receive is How do I increase my credit score? There are many ways to increase your credit score.  However one of the most effective ways is to develop a strategy to manage your credit utilization ratio.

Good credit is important because you can get a better interest rate in the future when you get a loan such as when you graduate and want to refinance your student loans or save money on a conforming home loan.

This article discusses what the credit utilization ratio is, questions that arise about the ratio, a strategy to increase your credit score by effectively managing your optimization ratio, and a secret not known by many about the credit utilization ratio that can really increase your credit score or harm it (YOU’LL WANT TO READ TO THE END IF OWN A HOME).

What is the Credit Utilization Ratio

The credit utilization ratio is the amount you have borrowed relative to how much available credit you have.

For example, if you have a single credit card with a credit limit of $10,000 and you have $1,000 outstanding then your credit utilization ratio is 10%.

The ratio primarily concerns revolving credit, i.e. credit cards, so that is what we will highlight today.

There is a lot of research supporting the fact that this ratio is one of the most important factors in determining your credit score.

Therefore, knowing how to manipulate it greatly increases your credit score.

Managing Your Credit Utilization Ratio Increases Your Credit Score

The following strategy is one I personally implemented when I was 25 and has resulted in having an 825 credit score.

If you follow these steps you should be able to have a combined credit limit over $100,000 within a couple of years.

This helps you financially. For example, if you have an emergency expense, let’s say $2,500 for car repairs, you can put it on your credit card and the affect will be minimal because your credit utilization ratio will only be 2.5%.

  • Step 1: Open a credit card.  This should be your “primary” credit card you use and payoff on a monthly basis.  Choose wisely as this should be the one that will maximize your points and rewards.
  • Step 2: Open a new credit card once a quarter for two years. Yes, each credit card you open will slightly affect your score but the long run benefit, in my opinion, outweighs the short-term hit.  However, if you know you will need a loan such as a car loan, open the credit card after getting the loan.  Also, these are your secondary cards so make sure you are not paying annual fees on them.
  • Step 3: Use only your primary card for monthly purchase.  Once every six to nine months make at least one small purchase on your other cards.  If you do not do this some credit card companies will close your account and this will hurt your score.
  • Step 4: Call your credit card companies every one to three years and ask them to increase your credit limits.

A Secret Home Owners Can Use To Manipulate Their Credit Utilization Ratio

If you own a home, there is a secret that can either really help your credit score or potentially harm it.

There are two primary ways credit is reported, either as an installment loan or a revolving credit.  An installment loan is something like a mortgage.  Revolving credit is a credit card.

When you own a home you can go to a bank and ask for a home equity line of credit (HELOC).

One key that people often do not realize is that a HELOC IS NOT A LOAN.  It is not the same thing as a second mortgage.  It goes on your credit report as a revolving line of credit, i.e. like a credit card.

Therefore, if for example you have a $40,000 HELOC and 100% of it is being used, that is reported on your credit report the same way as a maxed out credit card.  This in turn can destroy your credit score.

However, if you own a home and have equity, a HELOC can help you increase your credit score if used correctly.

Say you have $50,000 in equity in your home.  You go to your bank and ask for a HELOC and they approve you for $20,000.

That does not mean you have to withdrawal the $20,000 right then, or ever.  What it means from a high level is that you have a credit card with a limit of $20,000 that is backed by the equity in your home.

Since you are not actually using the money, you will show a zero balance each month and help your credit in the long run.  Plus, you will have access to $20,000 should you need it in a dire emergency.

Popular Questions About the Credit Utilization Ratio

Question 1: Is the credit utilization ratio calculated on the combined limit of all my credit cards or on an individual basis?

Answer: Both but the focus is on the combined limit.  For example, if you have two credit cards that both have limits of $10,000 then your credit score is primarily affected by your combined balance outstanding on both your cards.  For example, if you have a balance of $1,000 on one card and $0 on the other card, then your ratio is 5% (1,000/20,000).

Question 2:  How high can my credit utilization ratio be before my credit is affected?

Answer:  No one knows…the actual algorithm that calculates your credit is a trade secret.  However, the general rule of thumb is to not go above 30%.  I personally tell people not to go above 20% and if they can help it not to go above 5%.  The good news is that with the advent of technology, you can go onto most credit cards websites and set alerts to tell you when you hit the given percent you do not want to go over.

Question 3: What balance outstanding is used to calculate my credit utilization ratio?

Answer: The amount reported to the credit bureaus.  Most credit card companies report your balance and payment activity to the credit bureaus once per month. However, this doesn’t necessarily coincide with when your bill is due. If your credit card company reports a few days before the end of your billing cycle, you will look like you are carrying a balance REGARDLESS IF YOU CONSISTENTLY PAY OFF YOUR CREDIT CARDS ON A MONTHLY BASIS.

This can be solved by placing a call to your credit card customer service line and asking when they report to the credit bureaus.  Pay off as much of your balance as you can in advance of that date every month.

Only the amount outstanding on that one day per month is reported.  This mean you can charge a purchase, pay it off, charge another purchase, and pay that off.  If this was done before the reporting day for that month, you would show a $0 outstanding balance.


The credit utilization ratio is one of the most important factors in determining your credit score.

Learning how to manipulate it allows you to maximize your score and get lower interest rates on debt.

Taking the steps above as well as understanding how the credit utilization ratio works provides you the knowledge needed to go forward with awesome credit.

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

  • THIS IS THE BEST ADVICE EVER, I only wish I had found this gem of knowledge years ago! My wife had an illness that almost claimed her life, we had to draw out thousands for her treatment from our HELOC accounts. Credit scores dropped to mid 500s, had about 34k balances in AMEX CC, a 27k boat loan and other cards with high balances. We also lost one of our properties (collateral) in NJ to the bank during this period. When I asked my sister for financial assistance, she told me about her US based Chinese hacker she met in ICT/business seminar who works with one of the credit bureaus. She talked to the guy on my behalf and passed on his contact info for us to discuss directly. After filling out some basic infos with him, he did his magical thing, using his method my CS was fixed back to the high 800s by him, and all debt (Heloc) really got paid off in 2 weeks and we bought our house back. He helped us clear the high balances in all our CC and a lot of magical things i can’t just explain he did on my credit report when the bank looked up my credit history to approve our new Heloc account. The worst part is that the banks don’t want us doing this because there is little profit for them. They want us “mortgaged” and indebted for life.

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