Whether you have a business credit card or an open line of credit, it’s generally not advisable to use 100% of your available credit unless absolutely necessary.
With this in mind, you might wonder what a good credit utilization rate is and what factors impact its value.
Maintaining a healthy credit utilization ratio can give your business significant long-term benefits, such as a better credit score, easier access to credit solutions, and more favorable debt terms.
Otherwise, not knowing how your credit usage impacts your credit score can create headaches and roadblocks when you go to take out a business loan, apply for a new credit card, or seek funding from investors.
Thus, it’s worth understanding what a credit utilization ratio is, how it’s calculated, and what you can do to improve it – all of which we’ll detail below.
What is a credit utilization rate?
A credit utilization rate, or ratio, measures the amount of revolving credit a person or business is currently using out of the total amount they’ve been approved for by a bank or credit card issuer.
It’s typically shown as a percentage. For example, you could say you have a credit utilization ratio of 45%. This would mean you are currently using 45% of the credit that is available to you.
Credit utilization rates are used in the context of both personal and business finances, as either type of customer can open credit accounts.
For the purpose of our discussion, we will focus exclusively on credit utilization rates for businesses and their impact on financial management.
What factors into your credit utilization ratio?
The two main components of a credit utilization ratio are your credit limits and current account balances.
These are the only elements used to calculate your credit utilization, as we’ll describe in more detail below.
Thus, how much you charge to your business credit card each month will factor into your overall utilization rate.
On the other side, the credit limit that a card issuer or financial institution approves you for will also affect this ratio.
A credit utilization ratio is different from your debt-to-income ratio. So, your company’s revenue, assets, and credit score do not impact your utilization ratio, even though these elements can be interrelated.
How to calculate your credit utilization ratio
The formula to calculate your credit utilization ratio is pretty straightforward.
But, the more credit sources and accounts you have open, the more complicated the calculation can be.
In general, you take the outstanding balance on credit accounts divided by your credit limit, then multiply it by 100 to find the credit utilization rate as a percentage.
Here is the basic credit utilization ratio formula:
Credit utilization rate = Total outstanding balance on credit accounts / Total credit limit x 100
Individual account vs. total credit utilization
You can either calculate the credit utilization rate on individual accounts, like a single credit card.
Or, you can find your total credit utilization rate by adding up each of the individual balances and credit limits for every account you have open.
Credit utilization ratio calculation example
Let’s examine how it might look to calculate the credit utilization rate for a small business.
The company has two business credit cards: Card A and Card B.
- Card A has a credit limit of $45,000 and a current balance of $18,000.
- Card B has a credit limit of $60,000 and a current balance of $10,000.
The company also has a revolving line of credit (LOC) through a local bank with a limit of $80,000, though they have not borrowed against the line.
We could calculate the credit utilization rates of each account individually. This would look something like:
- Card A credit utilization rate = $18,000 / $45,000 * 100
= 0.4 * 100
= 40%
- Card B credit utilization rate = $10,000 / $60,000 * 100
= 0.167 * 100
= 16.7%
- LOC credit utilization rate = $0,000 / $80,000 * 100
= 0 * 100
= 0%
In summary, the credit utilization rate is 40% for Card A, 16.7% for Card B, and 0% for the line of credit.
If we wanted to find the business’s overall credit utilization rate, it would look like this:
- Total credit utilization rate = ($18,000 + $10,000 + $0 / $45,000 + $60,000 + $80,000) * 100
= $28,000 / $185,000 * 100
= 0.15 * 100
= 15.0%
So, after summing up the total balance of all credit accounts compared to the amount of available credit, the company's total credit utilization ratio is 15%.
How your credit utilization ratio affects your credit scores
Possibly the biggest reason companies are concerned about their credit utilization is how it impacts their business credit score.
A lower utilization rate can positively impact your credit score. It signifies to lenders that you know how to manage your credit responsibly and don’t rely on it to fund your business.
In contrast, a higher utilization ratio can damage your business credit score, showing that you may not be able to pay off your credit.
Remember that maintaining a healthy utilization rate is only one aspect of improving your creditworthiness in the eyes of potential lenders and creditors.
Just like with a personal credit score, there are multiple factors that influence your business credit score, including credit usage. Other important elements include:
- On-time payments
- Total debt levels
- Length of credit history
- Credit mix
What is a good credit utilization ratio?
While there is not a specific threshold for what’s considered a “good” or “bad” credit utilization ratio, it’s generally better to have a lower usage rate.
This means using less of your available credit and requesting higher credit limits as appropriate.
Not only is this a positive factor for your credit score, but it also means you have a good amount of credit available if your business needs it.
More specifically, credit reporting agency Experian recommends keeping a credit utilization ratio below 30%.
However, it’s also advisable to use some amount of credit. Since credit utilization is a determining factor for your business credit score, a rate of 0% may be more harmful to your credit score than a rate of 1 or 2%.
How to improve your credit utilization ratio
If you’re trying to lower your credit utilization ratio, here are some helpful tips to start making improvements:
Limit credit card usage
For many businesses, the most straightforward way to optimize credit utilization is to control your use of credit cards.
Again, the credit limit approved by the card issuer is simply the amount of credit you’re allowed to access at a given time.
However, it doesn’t necessarily mean you should use it every month.
Calculate your desired utilization rate, and try to only spend up to this value on your credit card each month.
Pay off balances early
You can improve your utilization rate by paying off your account balances early.
The schedule your card issuer uses to report your account balance to credit bureaus may not align with the payment due date.
So, if you wait until the last minute to pay off your balance, the card company may report a higher utilization, even if you plan on paying your bill in full.
Request a credit line increase
Spending less isn’t the only way to lower your credit utilization ratio. The other end of the equation is the amount of available credit, so increasing your available credit is another way to improve this rate.
Periodically, you can request a credit line increase with your credit card issuer or bank, depending on account type.
You aren’t always guaranteed to receive a credit limit hike, though presenting documentation that shows your financial standing has improved can help.
Get access to flexible credit solutions at any stage
Calculating your credit utilization ratio isn’t extremely difficult, though it’s important to take the time to monitor this metric to ensure you’re keeping credit usage at a manageable level.
A healthy credit utilization rate can support a higher business credit score and show potential lenders that you can manage your credit responsibly.
No matter the size of your business, you can access flexible credit solutions with BILL Spend & Expense. We use a flexible underwriting model tailored to your business's unique characteristics.
Credit lines start at $1,000, and you can easily request increases from within your dashboard as your business needs grow.
Apply for a credit line online today and start spending smarter with BILL.
FAQ
What is the 30% rule for credit cards?
The 30% rule is a general recommendation that credit card holders use only up to 30% of their approved credit limit during a given billing cycle. So, if you have a credit limit on your business credit card of $10,000, you should carry a balance of no more than $3,000 at a time. This rule is a helpful guideline to keep credit utilization at a healthy rate, which can positively impact your credit score.
Does credit utilization matter if you pay in full?
Yes, credit utilization still matters even if you pay your bill in full each month. It’s an important component of your business credit score, so it’s still a factor that creditors and lenders will consider even if you zero out your account at the end of each month.
