Now let’s say you have more than one credit card. All you would have to do to calculate your utilization rate would be to add up the total balances and the total limits of all your accounts using the same equation. It would effectively look like this:
First, calculate TOTAL CREDIT BALANCE
BALANCE of Credit Card 1
- BALANCE of Credit Card 2
- BALANCE of Credit Card 3
…etc.= TOTAL CREDIT BALANCE
Then calculate TOTAL CREDIT LIMIT
LIMIT of Credit Card 1
- LIMIT of Credit Card 2
- LIMIT of Credit Card 3
…etc.= TOTAL CREDIT BALANCE
Finally, calculate your total CREDIT UTILIZATION:
Credit Utilization = (TOTAL CREDIT BALANCE) / (TOTAL CREDIT LIMIT)
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For example, let’s say you have 3 credit cards open. Your balances (the amount you currently owe) on these 3 cards are the following:
Balance on Credit Card #1 = $250
Balance on Credit Card #2 = $500
Balance on Credit Card #3 = $75
Now calculate the total credit balance by adding the balances of all the cards:
TOTAL CREDIT BALANCE = Balance on Credit Card #1 + Balance on Credit Card #2 + Balance on Credit Card #3
TOTAL CREDIT BALANCE = $250 + $500 + $75 = $825
TOTAL CREDIT BALANCE = $825
Next, you need to calculate your total credit limit. You accomplish this by adding up the limits of all your credit cards. For this example, let’s say the limits for each card is the following:
Limit on Credit Card #1 = $1,000
Limit on Credit Card #2 = $750
Limit on Credit Card #3 = $1,500
Now calculate the total credit limit by adding the limits of all the cards:
TOTAL CREDIT LIMIT = Limit on Credit Card #1 + Limit on Credit Card #2 + Limit on Credit Card #3
TOTAL CREDIT LIMIT = $1,000 + $750 + $1,500 = $3,250
TOTAL CREDIT LIMIT = $3,250
Now we know that the total credit card balance is $825 and the total credit card limit is $3,250. Finally, let’s calculate the total credit card utilization rate by dividing the total credit balance by the total credit limit. That calculation would be the following:
TOTAL CREDIT CARD UTILIZATION RATE = TOTAL CREDIT CARD BALANCE / TOTAL CREDIT CARD LIMIT
TOTAL CREDIT CARD BALANCE = $825
TOTAL CREDIT CARD LIMIT = $3,250
TOTAL CREDIT CARD UTILIZATION RATE = $825 / $3,250 = 0.2538 = 25.38%
TOTAL CREDIT CARD UTILIZATION RATE = 25.38%
After completing all our calculations we find that our total credit card utilization rate is 25.38%. In other words we are currently using about one-quarter of our total available credit.
A utilization rate of 25.38% is fairly good. However, in this example we would probably want to pay down our debt a bit further. Some of the best credit scores tend to have utilization rates at 20% or below.
Being one of the most important factors in your credit score, the utilization rate is extremely important to understand. Still have questions? Comment below!
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