Definition
Credit utilization is the percentage of your available revolving credit that you're currently using. It's calculated by dividing total outstanding balances on revolving accounts (credit cards, personal lines of credit, home equity lines of credit) by the total credit limits across those accounts, then multiplying by 100 to get a percentage. In real estate contexts, credit utilization helps lenders assess how responsibly you manage short-term debt when considering a mortgage.
How to calculate
Formula: (Total revolving balances ÷ Total revolving credit limits) × 100 = Credit utilization percentage.
Example: Three cards with $5,000 limits each (total $15,000) and balances of $3,000, $2,500 and $2,000 give a total balance of $7,500. Calculation: (7,500 ÷ 15,000) × 100 = 50%.
Why it matters for home buying
- Lenders generally prefer a credit utilization ratio below 30%; lower utilization signals responsible credit management and lower default risk.
- A lower credit utilization often improves your credit score, which affects mortgage approval and interest rates.
- High utilization can make lenders worry you're overextended, potentially causing loan denials or higher mortgage rates.
Practical examples
| Credit Cards | Balance | Credit Limit |
|---|
| Card 1 | $450 | $1,000 |
| Card 2 | $300 | $2,000 |
| Total | $750 | $3,000 |
Utilization = (750 ÷ 3,000) × 100 = 25%. This level is generally favorable for mortgage underwriting.
Tips to manage utilization before applying for a mortgage
- Aim for under 30% across individual cards and overall revolving credit.
- Pay down balances before lenders pull your credit. Creditors typically report balances monthly, so time payments to lower the reported balance.
- Keep older credit lines open to preserve available credit and average account age, unless there's a compelling reason to close them.
- Consider asking for credit limit increases (without opening new accounts) to lower utilization, but avoid hard inquiries if possible.
- Use a HELOC responsibly—it's revolving credit and counts toward utilization.
Quick checklist for homebuyers
- Check your current credit utilization on each revolving account and overall.
- Pay down high balances, especially on accounts reported near the time of your mortgage application.
- Aim for utilization below 30% (ideally lower) to improve mortgage terms.
- Monitor your credit report for accuracy before lenders review it.
Bottom line
Credit utilization directly impacts your credit score and how lenders evaluate mortgage risk. Keeping utilization at or below 30%—and timing payments so low balances are reported—can improve your chances of mortgage approval and help you secure better interest rates.
