If you follow personal finance related blogs or websites you’ve undoubtedly seen the phrase “revolving utilization.” And, if you’re a credit junkie, like me, you’ve written about it countless times. Long story short, the revolving utilization percentage is one of the most important credit score measurements applied to your credit reports, and also one of the misunderstood.
I’ll be the first to admit that I don’t do a very good job fully explaining what revolving utilization is, how it’s determined, and just how important it is to your credit scores. I won’t make that mistake here.
Revolving utilization has a variety of aliases. It’s sometimes referred to as the “credit card usage percentage” and your “balance to limit ratio.” Rest assured, it’s all the same thing. The percentage in question is the numeric representation of your credit card balances relative to the credit limits on your credit cards.
So, for example, if you have a credit card with a $25,000 limit and a $10,000 balance then the revolving utilization of that card is 40%. You calculate the percentage by dividing the balance by the limit, and then multiplying that number by 100. The lower that percentage, the higher your credit score is going to be.
As far as the value of that percentage in your credit score, it’s major. The revolving utilization percentage is part of the category that contributes 30% of the points to your FICO credit score. In your VantageScore credit score the percentage of your credit limits used is considered “highly influential.” Point being, it is worth your time to learn everything there is to know about revolving utilization, and focus on keeping the percentage as low as possible.
According to FICO, the company that created the FICO credit scoring system, consumers with the highest FICO scores (785 and above) have an average revolving utilization percentage of 7%. So, in my example above, the $25,000 credit limit would have to be accompanied by no more than a $1,750 balance.
According to Sarah Davies, Senior Vice President of Analytics, Product Management and Research at VantageScore Solutions, FICO’s primary competitor in the credit scoring space, “The percentage of a consumer’s credit limit that is used is an important part of the calculation of their VantageScore credit score. Prime consumers typically use 28-30% of the maximum amount of credit a lender extends to them.”
This utilization percentage is calculated two ways: card by card and in aggregate. In order to calculate your aggregate revolving utilization percentage you’re going to need a copy of your credit reports which you can claim for free at annualcreditreport.com. The following are step-by-step instructions to help you with your math project.
Step 1: Identify every credit card on your credit report. This will include general use credit cards like Visa, MasterCard, Discover, and American Express cards that have revolving terms and are reporting as such. You will also need to include retail store credit cards and gasoline credit cards, again, as long as they have revolving terms and are being reported as such.
Step 2: Eliminate any cards from your project that are closed and have a $0 balance. Also, eliminate any cards that do NOT have a credit limit or a “high balance” being reported.
Step 3: Add up the balances on the remaining credit cards. Set that figure aside for now.
Step 4: Add up the credit limits on ALL credit cards that survived the Step 2 elimination process. If the card doesn’t have a balance it still needs to be included. If the card is missing the credit limit figure then use the high balance figure instead. Again, if the card is missing both the limit and the high balance then do not consider it. If the card has both a credit limit and a high balance figure, use the credit limit. If you’ve done this process correctly you should end up with a figure that is higher that the figure from Step 3.
Step 5: Now take the figure from Step 3 (aggregate balance) and divide it by the figure from Step 4 (aggregate limits). Take that figure and multiply it by 100.
Congratulations, you’ve just calculated your aggregate revolving utilization percentage.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring, and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.