A lot goes into a credit score. While the three nationwide consumer reporting agencies leverage different algorithms for calculating their scores, they all consider the same credit factors, including payment history, credit mix, and the age of your various credit accounts.

Most people are very familiar with the concept of keeping a good payment history or maintaining a credit mix. However, there is one lesser-known credit score component that is just as essential: your credit utilization ratio, or the amount of available credit that you are currently using. Whereas most of the other factors tend to stay consistent, your credit ratio can change from week to week, or even day to day, and can account for up to 30% of your credit score.

Fortunately, credit ratio is easy to understand and can be optimized to raise your credit score or keep it elevated.

What is credit utilization ratio?

Basically, your credit utilization ratio is the percentage of your available credit that you are using. For instance, if you have one credit card with a $1,000 limit and your current balance is $200, your credit ratio is $200 out of $1,000, or 20%.

Different credit scoring companies will leverage your credit data in different ways. For example, VantageScore will consider just revolving credit, or credit card accounts, when computing your credit utilization ratio. Companies monitor your total credit utilization, noting the balances and credit limits on each of your credit cards, along with the ratios of each individual account. If your overall ratio is relatively low but you have maxed out a card, your credit score could suffer.

It is important to understand that credit bureaus don’t calculate your credit utilization ratio using your current credit card balances. Instead, they calculate it using the account balances that your card issuers report to the bureaus. While each issuer has its own system, the reported figures are often the balances from your monthly statements.

Additionally, even if you continue to pay off your card balances each month, if you have a high credit ratio at any point in your billing cycle, it could negatively affect your credit score.

What is a good credit utilization ratio?

It is typically recommended that individuals keep their credit card balances at or below 30% of their assigned credit limits. While this is the general guideline, if you want an excellent credit score, you will have to keep your balance even lower—into the single digits. When it comes down to it, the lower the balances, the better for your credit score. Maintaining a low credit utilization ratio is a key element to your credit health and a manageable way to achieve an excellent credit score.