Q. My credit score is teetering on good/excellent, more towards good than excellent. I have 4 credit cards and that is all my debt. I have 0 balance on 3 of them. But Credit Karma says I’m using more than 30% of my credit. How is that determined, is that overall or on just the one card? Should I keep the other 3 and use them for small amounts and pay off monthly or totally close them? How do I move from good to excellent?

Dear Reader,

Your credit utilization ratio is the percentage expression of how much credit you use compared to how much credit you have available and is a very influential factor on your score. It’s calculated both per card and as a total taking into consideration all your revolving credit every month. Calculating your credit utilization ratio per card is rather easy. You simply divide the total balance on a credit card by the card’s credit limit, then multiply it by 100 to get the percentage ratio. For instance, if you have a card with a $1,000 credit limit and your balance is $400, your utilization ratio will be 400 divided by 1,000, multiplied by 100. That equals to a 40% utilization rate for that card on that specific month.

Your total utilization ratio is calculated the same way but using all of your credit card balances and all of your credit limits as a whole. So, if you had a total of three credit cards–two with a zero balance and a credit limit of $500 each–and the same credit card from the example above, you will have a total utilization ratio of 20%. Your total debt is still the $400 from that one card, but you have a larger total credit of $2,000 ($500+$500+$1,000). Although the total utilization ratio is optimal, the per card utilization ratio in this case is still high at 40%, which can negatively impact your score. From what you describe, it seems that you have a similar scenario in which your per card utilization ratio may be too high while your total is not. Calculate your utilization rate for the card with the balance and determine how much you should use per month to reach the recommended 30% utilization ratio.

If you are aiming to increase your score, you should not close any of your other accounts. Closing your credit cards increases your total utilization ratio because you will be reducing how much credit you have while your debt remains the same. A better alternative, as you suggest, is to use your three cards sparingly, keeping low balances and paying them off entirely each month. Playing with different balances will help you leverage per card utilization ratios and total ratio to reach the optimal balance.

Although your utilization ratio is significant, it is not the only factor that influences your score. Paying on time, the age of your credit history, what types of credit you have, and how often you apply for new credit also play a role. The varying degrees of how much these factors influence a score depends on the scoring model used. Currently, there are two main scoring models, the FICO Score, which is used by 90% of lenders in the industry, and the VantageScore, usually available for free through sites like Credit Karma. It’s essential that you note that there’s a distinction between the two and the scores they calculate. In fact, many consumers report having higher VantageScores than FICO Scores. Now, boosting your score with either model will take time, discipline, and a similar strategy. So, if you would like additional credit education and a personalized approach to help you transition to the “excellent” credit range you want, talk to an NFCC-certified credit counselor. A counselor can review your credit report in depth and help find areas of improvements to increase your score. You are on the right path. Good luck!

Sincerely, 

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

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