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Credit Card Utilization and Average Credit Scores

January 02, 2009

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Every credit score improvement article suggests that consumers should not have a high credit card utilization rate. (Defined as: total credit card balances / total credit card limits). Often the recommendation is the lower the credit card utilization rate, the better the credit score. Experts also suggest that the credit card utilization rate should never exceed 35%.

At Credit Karma, we think it is important to provide both the recommendation and the reasoning behind the recommendation. To put this tip to the test, we took a random sample of 70,000 credit scores, the corresponding credit card utilization rates, and graphed the results. The findings are very telling and support the claim that with credit card utilization the lower the rate, the higher the score – except for 0% utilization.

Credit Score Chart

FINDINGS

The data and chart do suggest there is strong correlation between a consumer’s credit card utilization rate and their credit score. The lower the credit card utilization, the better the credit score generally speaking.

There is one exception in this recommendation. At credit card utilization rate of 0%, the average credit score for this group is actually much lower than at the 1-10% (742 vs. 667). People with 0% credit card utilization could fall into 2 categories.

1) They don’t have a credit card because they have poor credit. Having a credit card and different types of credit help demonstrate credit worthiness in the eyes of lenders and credit scoring algorithms.
2) They don’t use their credit cards at all. This is the reason why credit score tips usually suggest you use your credit card every couple months if only on small purchase to show an active credit profile with positive payment history.

With the results in mind, it would be unproductive to suggest not carrying a balance at all since this is a primary benefit of credit cards. The reality is that many consumers need the convenience of revolving debt from credit cards. Keeping this mind, we suggest keeping your balance lower than 35% on all your credit cards and making sure you pay on time and the debt is something you can manage.

THE WRONG CONCLUSION

For the casual reader, it is important NOT to infer that credit card utilization rate is the only driver of credit scores. In reality, there are hundreds of attributes (we plan on sharing many more). These numbers represent the average, meaning that a person with high credit card utilization can still have a good credit score if the other variables are positive.

It is also noteworthy that there may be other factors that make high credit card utilization such a telling statistic. For example, an individual with high credit card utilization may only have credit cards as their only credit vehicle suggesting that they are indeed more risky. Or perhaps the high credit card utilization is a result of a credit card company reducing their credit limit because the individual is taking on too much debt. In many ways, credit troubles can build on itself so it is best to always actively manage your credit and make responsible use of the credit and credit access you have.

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Though this data suggests a trend, keep in mind that there are many other variables behind the credit scores above. In general, this correlation makes sense, but 0% utilization people could be very active card users that always pay off their balance each month. Also, to fit the correlation above, you have to fit the consensus model from which it was derrived, which I don't. My score is much higher than it should be compared to the graph above. That is because of the many other variables that play on the FICO score. Utilization rate is typically 30% of your overall score, per myfico.com

49reasons 1 year ago

I use one of my two credit cards the one that has a 40k limit

for everything that I possible can to rack up air miles. I always

pay my monthly balance in full - how will my credit card usage

effect my 778 FICO score. I noticed a big score drop 810 to 778

after taking out a 13K loan for a used car... how can I increas

my score?

RASSKKLLE 1 year ago

Provided you pay your balances in full each month, there should be no adverse effect. When it comes to the drop, a 778 is still super-prime. There won't be much you can do aside from paying down the debt.

Keep in mind, excellent credit is to be user for your benefit(like getting a great rate on your auto loan). Trying to maintain a 800+ all the time, will mean you won't always be able to use that great credit score which somewhat defeats the point.

CK Moderator

keeping utilization below 35% . what does it mean . keep combined utilization of my all cards below 35% ( some card balance might be above 35% ) or keep each card utilization below 35% . please elaborate

manuvns 1 year ago

The simple answer is both. You want to keep your combined credit card utilization lower than 35%. At the same time, you don't want any single card to be over utilized. Both are factors. For clarity, our chart is representative of the combined credit card utilization.

CK Moderator

Correct me if I am wrong, but I understand the utilization as the average balance on the card. For example, I pay my bill in full every month, but any given day of the month including the day after I paid of the balance, I have about 15% utilization even though I pay my bill in full.

mjboyle508 1 year ago

If I am trying to rebuild credit, what is the best way to do so? At this point in time I've got two credit cards, one of which is paid in full and never used, the other is used nearly daily but never carries a balance. How can I effectively use these cards to help build credit?

rutibegga 1 year ago

@49resons: I don't think utilization means the same as carrying a balance. 0% Utilization means you really did not use your credit card at all. The other way round: If you have a credit card with a $10,000 limit, you use it for payments of $1,000 a month and pay off 100% of your balance at the end of the monthly invoice cycle, your utilization is still at 10%.

kindofguy 1 year ago

The credit utilization is calculated from data reported to the credit bureaus. Which is practically always when you get a new statement, and the amount will be the statement balance.

evergreen16 1 year ago

I always pay my CC balance(s) in full by the due date, but the accounts are considered to be utilized and it's adversely affecting my score. Also be aware that opening a HELOC or other loan/credit line whether you utilize the HELOC or not will lower your score (30-50 maybe even more points). It was a big suprise to me when I opened my HELOC.

gszakacs 1 year ago

Yes because reported credit card balances are based on the report day and not your billing cycle, you may show utilization even though you don't carry balances. If you are always at high utilization, getting more available credit will help your score.

With regards to a new line of credit, any credit application will affect your credit score. In most cases, these application inquiries will stop affecting your credit score within 60-120 days provided you aren't always applying for credit.

CK Moderator

The comments made are very helpful, however I don't quite understand the method mentioned as to what is the best way to raise your credit score.

RichBooker 1 year ago

Is HELOC considered like a credit card for credit score calculation? I have drawn about 50% of the HELOC credit limit and pay the minimum required amount. Recently my HELOC provider dropped "Available amount" to zero, meaning I can no longer draw more from HELOC although the credit limit is twice the outstanding balance. How is this affecting my credit score? I could pay off some debt to bring utilization to 35% of credit limit, but I noticed that the Available amount continues to be zero.

MDAKWALE 1 year ago