When you’re applying for a car loan, lenders look beyond your credit score. One of the biggest factors they check is your credit utilization. But what is credit utilization, and why does it matter so much? This guide will break down everything you need to know — and how you can use it to your advantage.
A credit utilization ratio sounds fancy, but it’s actually pretty simple. It’s the percentage of your available credit that you’re currently using.
Here’s the quick math:
Credit Utilization = (Total Credit Used) ÷ (Total Credit Limit)
Example:
If you have a credit card with a $1,000 limit and you’re carrying a $500 balance, the calculation looks like this:
$500 ÷ $1,000 = 50% utilization
This number matters because credit utilization makes up 30% of your credit score — that’s nearly a third of it! If your utilization is high, lenders may see you as a bigger risk. That’s why keeping this percentage low is essential if you want to qualify for loans with better terms and lower interest rates.
So you may be wondering why your credit score matters when buying a car? When lenders look at your credit report, they don't just see your credit score — they see everything behind it, including your credit utilization. This percentage tells them how well you manage debt.
Here’s how it can affect your car loan:
Higher Interest Rates — If your credit utilization is high, lenders may charge a higher interest rate. This means you’ll pay more for the same car compared to someone with lower utilization.
Loan Denial — If your utilization is too high, lenders might deny your application, even if your credit score is decent.
Tougher Loan Terms — Lenders may require a larger down payment or offer shorter loan terms, which can increase your monthly payments.
If you’ve been maxing out your credit cards or carrying high balances, lenders see that as a red flag. To them, it’s a sign you might be relying too much on credit.
The magic number to remember is 30% or less. Lenders prefer borrowers who are using less than 30% of their available credit. But if you really want to stand out, aim for 10% or lower.
Borrowers with top-tier credit scores often have single-digit utilization rates.
Here’s how to stay on track:
Check your credit usage every month — Don't wait until you apply for a car loan to check it.
Look at each card individually — Lenders review both your overall utilization and your utilization on individual cards.
You can track your utilization using most credit card apps, and your monthly credit card statements often display this information. The goal is to know your number before applying for a loan.
How to improve my my credit score when I have a high credit utilization ration? If your credit utilization is over 30%, don’t panic. You can lower it quickly with a few strategic moves.
Here are three proven strategies to lower your utilization fast:
Pay Down Balances — Focus on paying off the credit cards with the highest balances first. Even small payments can lower your utilization.
Request a Credit Limit Increase — If you increase your credit limit but keep your balance the same, your utilization percentage automatically goes down. Just be sure not to use this as an excuse to spend more.
Avoid Opening New Accounts — New credit applications trigger hard inquiries that lower your score. Plus, new accounts reduce the average age of your credit history, which also affects your score.
By using even one of these strategies, you’ll see a drop in your credit utilization — and a better shot at loan approval.
When you’re ready to apply for a car loan, you want to put yourself in the best position possible. Here’s how to do it:
Check Your Credit Report for Errors — Mistakes happen. Dispute any errors on your report, like incorrect balances or late payments, so they don’t drag down your score.
Build a Strong Payment History — Payment history makes up 35% of your credit score, so pay your bills on time, every time. Late payments can stay on your credit report for 7 years.
Get Pre-Approval from Multiple Lenders — Pre-approval shows you what you qualify for before you walk into a dealership. It also gives you more power to negotiate better rates.
These steps put you in a stronger position to get approved for a car loan with better terms and lower interest rates.
Your credit score is a three-digit number that tells lenders how risky it is to lend you money. It’s like your financial report card, except instead of getting an “A” or an “F,” you get a number from 300 to 850.
Here’s how the scores break down:
If you’re in the “Good” to “Excellent” range, you’re in great shape. But if you’re in the "Fair" or "Poor" range, don’t stress — you can raise your score with a little effort.
Your credit score isn’t random. It’s calculated using 5 key factors. Here’s the breakdown:
Payment History (35%)
This is the most important factor. Pay your bills on time, and you’re good. But if you miss payments, they can stay on your report for up to 7 years.
Credit Utilization (30%)
We talked about this earlier, but it’s worth repeating — keep your utilization below 30%, and for a stellar score, aim for under 10%.
Length of Credit History (15%)
This measures how long you’ve had your credit accounts open. Older accounts show lenders you have experience managing debt. Closing old cards can lower your score.
New Credit Inquiries (10%)
When you apply for new credit, lenders check your report, which triggers a “hard inquiry.” Too many inquiries in a short time can lower your score.
Credit Mix (10%)
This measures the types of credit accounts you have — like credit cards, personal loans, and car loans. Lenders like to see a healthy mix.
If you want to raise your credit score, focus on these two key areas:
If you focus on just those two factors, you’ll see your credit score improve.
Your credit utilization and credit score both play a huge role in getting approved for a car loan. Here’s a quick recap:
Keep your credit utilization under 30% — and under 10% if you want to stand out.
Your credit score is based on 5 key factors — payment history, credit utilization, length of credit history, new credit inquiries, and credit mix.
To boost your car loan approval odds — check your credit report for errors, build a strong payment history, and get pre-approval from multiple lenders.
By taking control of your credit, you’ll be in a stronger position to get the car you want with better loan terms and lower interest rates. If you have questions or need guidance, reach out to First Alliance Credit Union. We’re here to help you every step of the way.