What is a Credit Utilization Ratio?

Your credit utilization ratio matters when you're looking for a mortgage or business loan. Here's what you need to know about how it works and why it matters.

What is credit utilization?

Credit utilization is the percentage of your available revolving credit that you're currently using. It applies to accounts like credit cards and home equity lines of credit where you can borrow, repay, and borrow again.

Lenders look at this number to see how you handle debt. They typically prefer you use less than 30% of your available credit. Using more might suggest you're having trouble with your finances, which could hurt your credit score.

How to calculate it

1. Add up all balances on your revolving accounts

2. Add up all your credit limits

3. Divide your total balance by your total limits

4. Multiply by 100 to get a percentage

For example:

• Credit Card A: $450 balance, $1,000 limit

• Credit Card B: $300 balance, $2,000 limit

• Total balance: $750

• Total limit: $3,000

• Utilization: $750 ÷ $3,000 = 0.25 = 25%

Why it affects your credit score

Credit utilization is often the second most important factor in your credit score, right after payment history.

Lenders worry when they see maxed-out credit cards. It suggests you might be spending more than you can afford. But a low utilization rate shows you can handle credit responsibly, making lenders more confident about lending to you.

How KOHO Credit Builder can help

KOHO users see their credit scores go up by 22 points on average after just 3 months.* Unlike traditional credit cards that might tempt you to spend more, Credit Builder offers a different approach to improving your credit.

The process is simple: KOHO opens a line of credit separate from your balance. Each month, they set aside a small amount from this line and report it as an on-time payment to Equifax. These consistent payments help build positive credit history without the risks of traditional credit cards.

A better credit score doesn't just look good on paper—it saves you real money. For example, on a $15,000 loan with 12 monthly payments, good credit could save you nearly $3,000 in interest.

What makes KOHO Credit Builder worth considering:

• No credit check required

• Guaranteed approval

• No security deposit needed

• Access to financial coaches who can guide your credit journey

• Ability to track your Equifax credit score directly in the app

To get started, just open the KOHO app and tap Credit > Subscribe to Credit Building.

*Credit scores are based on complex models involving a variety of factors. Consistent on-time payments help improve scores. Missed or late payments may cause credit scores to decrease. Outcomes may vary among users.

How to improve your ratio

Pay down your balances

The best way to lower your utilization is to reduce what you owe. Create a budget and use any extra money to pay down debt.

Since credit card balances can change throughout the month, try paying your card soon after making purchases. You can also ask your lender when they report to credit bureaus and make payments just before that date.

Increase your available credit

You could also ask for higher credit limits or open a new card. But be careful—this approach has risks:

• Requesting a limit increase might trigger a hard credit check, temporarily lowering your score

• Higher limits can tempt you to spend more

• New accounts reduce your average account age

Lenders might increase your limit if your income has gone up or your credit score has improved. Some even offer automatic increases to reliable customers.

Take control of your credit utilization

A credit utilization ratio below 30% can boost your credit score and improve your chances of getting loans with better terms. Whether you choose to pay down debt or increase your available credit, keeping this number low can help build a stronger financial future.