While it’s a good idea to responsibly manage several, diverse credit lines, it’s never recommended that you rack up heavy balances on each account. There’s a personal finance concept called “credit utilization” and if high, it poorly affects your credit rating. If you’re like millions of other Americans, due to holiday spending, your credit utilization ratio usually takes a hit in the first half of the year.

How Does Credit Utilization Affect My Fico Score?

Credit utilization is related to your debt-to-income ratio. In the eyes of a creditor, relying too much on credit is a negative trait. Excessive credit card balances will increase your credit utilization score. The higher it is, the worse it looks on your FICO report. If your monthly expenditures exceed your monthly income, it’s time to buckle down and reevaluate your financial situation. Before you know it, you’ll be trapped in a vicious cycle wherein you’re only paying off interest and the debt keeps piling on; because your credit utilization score will rise in this scenario, your FICO score will also sink, thus resulting in even higher interest rates. An unbalanced debt-to-income ratio can cause significant damage to one’s credit rating.

How do I Calculate My Credit Utilization Ratio?

Calculating your credit utilization number is easy. To figure it out for a single credit card, simple divide the monthly balance by the card limit. You’ll get a decimal number. The two numbers after the point is your utilization rate for that card. If you have multiple lines of credit and want to figure out your overall utilization ratio, simply add up all the limits and monthly balances and do the same division as you would with a single card.

How Do I Combat a Negative Credit Utilization Ratio?

The two most important credit utilization factors pertaining to your FICO score are:

1) the utilization rate of your most extended credit card; and

2) your overall ratio.

If you’re looking to improve your FICO rating, keep your credit card balances as low as possible. The best benefits come when you’re using less than 10 percent of a card's credit limit.

The optimal amount of debt to carry on revolving credit lines is between 10% and 30%. The best way to improve your credit rating is to always make payments on time. If you stick to that easy-to-remember formula, your credit utilization ratio should remain steady and not signal a red flag on your credit report.