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Bottom Line Up Front

  • Your credit utilization ratio is how much of your available credit (credit limit) you use. Aim to keep yours below 30%.
  • Improve your credit score by paying your bills on time, paying down credit card balances and checking your credit report for errors.
  • Be aware that closing a credit card or taking out a loan can impact your credit as well.

A great credit score can open a door to greater financial freedom. It can help you qualify for better interest rates and better terms and, most of all, makes a difference in your ability to get credit when you need it. But what happens if your score drops? Here are some of the things that can affect it.

Your Credit Utilization Ratio Went Up

What is a credit utilization ratio? One of the things that affects your credit score the most (up to 30%) is your credit utilization ratio. That’s how much you’ve used of your available credit (credit limits) for all your revolving credit accounts (credit cards and lines of credit). The more money you borrow, the higher your credit utilization ratio will be. So, your credit score is likely to drop.

On the other hand, if you use less of your available credit, you’ll have a lower credit utilization ratio. That will suggest you’re able to manage money well and don’t overspend. Some ways to keep your utilization ratio low include paying down balances, keeping credit cards you don’t use open and increasing the limit on your credit card, if you can.

What is a good credit utilization ratio? If you’re thinking, “Okay, then what’s a good credit utilization ratio?”, we usually suggest keeping it to less than 30%—and the lower the better.

How do I know what my credit utilization ratio is? It’s easy to figure it out. Just divide how much you owe by your credit limit (on your revolving accounts). Don’t include loans like mortgages or car loans, just your credit cards and lines of credit.

Here’s an example. Suppose you have just one credit card and it will allow you to charge up to $5,000 (your credit limit). Let’s say your balance is $2,500. Your credit utilization ratio in this case is 50% because you have $5,000 available, and you’ve used 50% of that.

$2,500 ÷ $5,000 = .50 (50%)

If you have more than one account, you’d use same formula, but combine everything together:

Total of All Balances ÷ Total of All Credit Limits = Credit Utilization Ratio

Tip: If your credit utilization ratio is 30% or higher, try paying down some of your balances.

You Closed a Credit Card

You may be tempted to close a credit card once the balance hits $0. But doing so might reduce your amount of available credit, potentially harming your credit utilization ratio. If you’ve had the credit card for a long time, closing the account also could change the average length of your credit history. And, a shorter credit history can have a negative effect on your credit score.

Tip: Unless you’re paying large annual fees, decide if it’s better to keep an unused credit card open. If you’ve already closed the account, try to lower your spending on your other accounts to improve your utilization ratio.

You Missed One or More Payments

When life is busy and you’re juggling several due dates, it’s easy to miss a bill. As soon as you realize what happened, make a payment immediately. The reason is that a lender may not report a payment that’s only late by a few days to the credit bureau. But if a payment is more than 30 days late, your credit score will almost certainly take a hit.

Tip: Set up automatic payments for all your bills, or use Navy Federal Credit Union’s Bill Pay service so you never have to worry about missed or late payments.

You Recently Applied for a Loan or Line of Credit

Applying for a new loan or line of credit gives lenders permission to request your credit report. It’s known as a hard inquiry. Hard inquiries are will stay on your credit report for 2 years and, depending on the circumstances, can lower your credit score somewhat for about a year. Shopping for the best rates on a loan (e.g., a student loan) will be considered as just one inquiry. However, if you apply for multiple types of credit at the same time (e.g., a credit card and a mortgage), you’ll see a larger effect on your score. That’s because lenders may see you as less financially stable and a potential risk when it comes to repayment.

Tip: If you’re going to shop around for the best rate, do it within a short time—say, 2 weeks. And once you do get new credit (e.g., mortgage), wait awhile before you apply for more (like a credit card).

There Are Errors on Your Credit Report

Although it doesn’t happen often, sometimes, information on your credit report may be outdated or reported incorrectly. For example, if the amount you owe is reported incorrectly or a payment is accidentally reported as late, your credit score could be affected.

Tip: Check your credit reports regularly. Once a year, you can get reports for all 3 major credit bureaus for free. Visit and make sure to dispute any errors you spot.

You’re a Victim of Identity Theft

A sudden and/or large drop in your credit score could signal identity theft. Check your credit reports for anything that seems unusual, like strange addresses or unfamiliar accounts. Navy Federal members can use our free Mission: Credit Confidence® Dashboard to sign up for alerts that will tell you if your credit score changes.

Tip: Report suspected identity theft to your lender(s) and to the Federal Trade Commission. Then, dispute the information on your credit reports. Consider freezing your credit, setting up a fraud alert or engaging a credit monitoring service to protect yourself from further issues. If you freeze your credit, you can remove or lift it temporarily, if you need to.

Want to Improve Your Credit?

If your credit score has taken a hit, Navy Federal can help you rebuild and manage your credit with Mission: Credit Confidence™. If you’re looking for more information on getting your finances in order, check out our personal finance counseling page. You can also speak with a financial advisor for personalized assistance. Just select the orange Get Started button at the bottom of the page or call 1-888-503-7106.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.