What Is Revolving Utilization?

For businesses, revolving lines of credit offer flexibility, allowing you to borrow as needed and only pay interest on what you use. Unlike traditional loans, a revolving, asset-based line of credit gives you ongoing access to funds, allowing you to borrow, repay, and borrow again as needed, based on your business’s cash flow and assets.

This flexibility can help manage working capital, bridge gaps in cash flow, and support growth opportunities without the need to reapply for credit each time. By carefully managing your revolving utilization rate, you can maintain a healthy credit score while making the most of your available credit.

In this post, we’ll dive into how revolving utilization works, why it matters, and how managing it effectively can unlock better financial opportunities.

Understanding Revolving Credit

Revolving credit allows you to borrow up to a certain limit, repay it, and borrow again as needed. Lines of credit are a common example, offering flexibility to access funds based on your current financial needs. Unlike revolving credit, installment loans provide a lump sum upfront with fixed repayment terms, and once paid off, the loan is closed.

Revolving credit is ideal for businesses, as it offers ongoing access to capital, making it easier to manage cash flow, cover unexpected expenses, or seize growth opportunities without the need to reapply for financing each time.

What Is Revolving Utilization and Why It Matters

Revolving utilization is the percentage of your available credit that you’re using at any given time. It’s a key factor in credit scoring, with a direct impact on your business’s financial health. Lenders closely monitor revolving utilization as it reflects your ability to manage credit responsibly.

A high utilization rate—using a large portion of your available credit—can signal financial stress or overextension, potentially lowering your credit score. On the other hand, a lower utilization rate indicates that you are managing your money wisely, which can in turn boost your score. Since revolving utilization can change from month to month, it’s important to keep it in check, as it impacts your ongoing creditworthiness and financial stability.

How to Calculate Your Revolving Utilization Rate

Calculating your revolving utilization rate is simple and essential for understanding how much of your available credit you’re using. Here’s the basic formula:

Revolving Utilization Rate = Credit Card Balance ÷ Credit Limit

This gives you the utilization rate for a single credit card. To determine your total utilization across multiple cards, you’ll follow the same basic formula but use the total balance and total credit limit across all cards.

Example 1: Individual Credit Card Utilization

Credit Limit: $5,000

Credit Balance: $2,000

Utilization Rate = $2,000 ÷ $5,000 = 0.4 or 40%

Example 2: Total Credit Utilization

Let’s say you have three credit cards with the following details:

Card 1: $2,000 limit, $800 balance

Card 2: $3,000 limit, $1,200 balance

Card 3: $1,000 limit, $400 balance

To calculate total utilization:

1. Add up your total credit limits:$2,000 + $3,000 + $1,000 = $6,000

2. Add up your total balances:$800 + $1,200 + $400 = $2,400

3. Apply the formula: Utilization Rate = $2,400 ÷ $6,000 = 0.4 or 40%

So, your total revolving utilization rate is 40%.

Steps to Calculate Utilization for Multiple Cards

1. ‍List all credit cards: Write down each card’s credit limit and balance.

2. ‍Calculate individual card utilization: Divide each card’s balance by its limit.

3. ‍Add up credit limits: Add the credit limits of all your cards together.

4. ‍Add up card balances: Add the balances of all your cards.

5. ‍Calculate total utilization: Divide the total balance by the total credit limit to get your overall utilization rate.

By keeping track of both individual and total utilization rates, you can ensure you’re staying within healthy limits, which can help improve your credit score and financial health.

What Is a Good Revolving Utilization Rate?

For businesses, a good revolving utilization rate is typically below 30%, as rates above this can signal financial strain and impact your credit score. To maximize your financial health, aim to keep your utilization under 20-25%, which is generally seen as optimal by most lenders.

Lower utilization demonstrates responsible credit management and improves your creditworthiness. While these thresholds are widely recommended, the ideal rate may vary slightly depending on your industry and the type of financing you're seeking.

Managing your utilization effectively can enhance your business credit profile and increase access to favorable financing options.

How to Lower Your Revolving Utilization

To improve your revolving utilization rate and boost your business credit score, consider these actionable strategies:

Pay down balances: Reducing your credit card or line of credit balances is one of the quickest ways to lower your utilization rate.

Request credit limit increases: Ask your lender for a higher credit limit, which can immediately lower your utilization rate if your balance remains the same.

Open new credit accounts: Adding another credit line increases your total available credit, helping lower your overall utilization.

Pay before the billing cycle ends: Make a payment before the statement date to reduce your balance, which will lower the utilization rate reported to credit bureaus.

Spread balances across multiple cards: If you have multiple credit lines, distribute your balance evenly to keep utilization low on each card.

By implementing these strategies, your business can maintain a healthier utilization rate, improving your credit profile and making it easier to access favorable financing in the future.

The Impact of High Revolving Utilization on Your Credit Score

For business owners and brand founders, high revolving credit utilization can have serious consequences on your credit score and lending opportunities. WHen your utilization rate is too high, it signals to lenders that your business may be overextended, increasing the perceived risk of lending to you. As a result, lenders may be less likely to approve your applications for credit.

In addition to potentially reducing loan approvals, high utilization rates can also lead to higher interest rates on any credit you’re able to secure, as lenders may view your business as a higher-risk borrower. Over time, consistently high utilization can cause your credit score to decline, making it more difficult to access favorable financing terms in the future.

To learn more about how credit utilization affects your credit score and how to manage it effectively, visit Experian’s credit score guide.

Ways Business Owners Can Manage Revolving Utilization

For business owners, managing revolving utilization is key to maintaining a healthy credit profile and securing favorable financing. Here are some strategies focused on asset-based lines of credit, which can help businesses manage utilization effectively:

Leverage asset-based lines of credit: Using a line of credit backed by business assets (such as accounts receivable, inventory, or equipment) allows businesses to access funding without worrying about high utilization affecting credit scores. This approach helps manage cash flow while keeping your utilization rate in check.

Request credit limit increases: If your business is growing, ask your lender for a higher credit limit on your asset-based line of credit. A higher limit gives you more available credit, reducing your utilization rate even if your balance remains the same.

Pay down balances strategically: If you have an outstanding balance on your asset-based line, prioritize paying it down before the billing cycle ends. This can reduce your reported utilization rate and help you maintain a strong credit profile.

Monitor your credit regularly: Keep track of your asset-based credit lines and their utilization rates. Regular monitoring helps ensure you stay within healthy limits and can take action if your balance starts to creep up.

By using these strategies, business owners can effectively manage revolving utilization on asset-based lines of credit, enhancing their credit profile and improving access to financing. For more guidance on managing business credit, check out this SBA resource on asset-based lending.

Strengthen Your Financials with Smart Credit Management

Managing revolving utilization is key to long-term financial stability. A healthy utilization rate demonstrates responsible credit management and is crucial for securing favorable financing terms.

Understand and calculate utilization: Regularly monitor your credit usage and aim to keep your utilization below 30%, ideally under 20%. This helps maintain a strong credit profile.

Manage credit wisely: Use credit lines strategically—avoid maxing out limits, request credit limit increases, and pay down balances promptly to keep utilization low.

Benefits of Smart Credit Management

Better loan terms: A low utilization rate can lead to better interest rates, higher credit limits, and more favorable loan conditions.

Improved financial resilience: Effective credit management strengthens your ability to manage cash flow and respond to unexpected expenses, ensuring your business is financially stable.

By managing revolving utilization, you can access better financing, improve your creditworthiness, and build a resilient financial foundation for your business.

Unlock Financial Opportunities with Assembled Brands

At Assembled Brands, we offer flexible financial products designed to help businesses manage credit utilization and fuel growth. Our growth lines of credit and financing solutions provide the capital you need without the hassle of constantly reapplying. With competitive rates, flexible terms, and expert guidance, Assembled Brands is your partner in achieving financial stability and success.

Ready to improve your credit profile and unlock new opportunities? Explore our financial products and discover how we can support your business growth.

FAQs

What is revolving utilization?

Revolving utilization is the percentage of your available credit that you're currently using. It's a key factor in assessing your creditworthiness and reflects how well you're managing your credit.

How does revolving utilization affect my credit score?

A high revolving utilization rate can lower your credit score, signaling financial stress or overextension. Conversely, a lower utilization rate typically boosts your score, demonstrating responsible credit management.

What’s considered a good utilization rate?

A good utilization rate is typically below 30%. To maximize your credit health, aim for a rate of 20-25% or lower.

How can I quickly lower my utilization rate?

You can quickly lower your utilization rate by paying down your credit balances, requesting higher credit limits, or spreading balances across multiple cards. Additionally, making payments before the billing cycle ends can reduce the balance reported to credit bureaus.

Does revolving utilization apply to all types of credit?

Yes, revolving utilization applies to any revolving credit, such as credit cards or lines of credit. It doesn’t apply to installment loans, which have fixed terms and lump sum repayments.

Can high utilization impact my ability to get loans?

Yes, high utilization can make it harder to secure loans. Lenders may view high utilization as a sign of financial strain, increasing the perceived risk and potentially leading to higher interest rates or loan denials.