Credit News

Credit Card Utilization and Average Credit Scores

by Staff Writer, Credit Karma

January 02, 2009 | 48 comments

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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USER COMMENTS(48)

felipeii
Nov 12
4:01 pm

I use my credit cards as if they were like charge cards. As soon as they are posted I pay in full before the statement date. I have online banking which only allows so many payments per cycle . For example Citibank has two different websites one citibank.com and citicard. When I am not able to pay through Citicard I pay through Citibank. I also do what is known as pushing a payment resulting in the credit card company showing them owing me. I get a C rating for my Utilization rate of 0% . My current Equifax fico score is 806 and my TransUnion Fico Score is 798 while your score (TransUnnion based) is 787. My question is : By my overpaying my credit cards am I hurting my credit scores ?

CK Moderator

Those are great scores across the board. By overpaying, you may fool some models into thinking you have limited credit activity. I suspect an easy test would be to not over pay one month and check your score the following month.

nparker13
Nov 8
4:45 pm

I dont understand how Credit Karma calculates this. I have never carried a balance, and have an excellent credit score, yet my utilization on CK is 100%. Would it help to get a credit line increase or open another card? I prefer to spend the majority of my purchases on one card, since I get better rewards on that card. Is this the reason?

CK Moderator

Having more than one card generally helps. You can see how we calculate your specific CCU within the credit report card.

fjh3026
Nov 7
3:24 pm

Very good article. Thanks.

kma412
Oct 27
3:13 pm

I have a revolving balance on my Amex card, and although my card has a credit limit, the credit bureaus don't have a limit listed. My total credit card limit, then, is calculated using only my Visa/MC and dept. store cards while my total balance include those cards + Amex. As a result, while my actual utilization rate for all cards is around 50%, it looks like it's well over 100%, which obviously effects my credit score. Is there anything I can do about this?

CK Moderator

Some credit cards do not report the limit. While this can sometimes distort your credit card utilization, there is not much you can do since there is no legal requirement to report the limit.

KerriD
Oct 22
2:10 pm

I have several credit cards, which all have a balance of zero, should I cancel any of these cards?

CK Moderator

Unless they have an annual fee or you have 12+, our general advice is to keep your credit cards open to build history. The major downside of this strategy is keeping an eye on the accounts to make sure they are not being used fraudulently.

mmatteo404
Oct 19
7:30 pm

I've recently noticed that two of my Visa Signature Credit Cards report the Credit Limits as being ZERO on certain bureaus (they set a "guideline" not a limit). The data that suggests the Limit is ZERO is not the case; however, it's just the way the issuer reports it to the bureau. I've contacted the two issuers involved, and they simply provide a bag of excuses. In addition, I've contacted the credit bureau, and they provide NO answers to this issue either...go figure!

Do you have any recommendations? I have a good score, but I suspect the Signature Cards are bringing it down a bit (current score is 780).

CK Moderator

With a 780, more credit limits will probably not help you score much. With such a high score, it is usually about length and breadth of credit history. Regardless, you should qualify for the best rates.

Cinderella12
Oct 10
12:24 pm

My credit score is 703. It is rated between "Fair" and "Good." How do I increase my credit score to "Very Good?"

SJClear
Oct 8
7:23 am

How does am AMEX account that has no defined credit limit figure into the calc for credit utilization? thanks!

CK Moderator

Some cards simply do not report a limit. In these cases, the score may use high balance or simply ignore certain data points.

amimar77
Oct 3
5:25 pm

I have multiple credit cards with excellent lines of credit and am responsible/on-time with payments.

I own my own home, have no bad credit history and yet only have a credit score of 775.

What do I have to do to increase my score?

CK Moderator

Try playing with using the credit report card. It should give you a guide of things you could do but just remember you score is already excellent.

MSJ7
Sep 23
8:22 pm

Remember the commercial where the list of confusing real estate loans was boiled down to the line "It's a lot easier if you just pay cash."

I like my credit card utilization at ZERO. Why? Because I have been burned by these criminals. Yes, Criminals because miss a payment and they can jack the interest up so high that in Texas they call it usury, a crime. They will lay in wait for you mess up - your fault - their fault - the Post Office's fault - doesn't matter because they win with late fee and increased interest rate.

Congress recognized this problem and enatcted legislation to reign in these crooks and it is slowly taking effect.

I resent the fact that the Credit Card Industry has gone in with the credit scoring industry to compel people to use their credit cards. I am not sure if it is legal or not, but it sure does smell bad.

I would like to have Congress investigate this practice and stop it.

For me, I will use my debit card and use my Credit Union. My Credit Union respects my business so much they don't even pull a credit report when I need a new car. As for the rest "it's a lot easier just paying cash" even if it cost be a few points on my score.

fatalerrorx2
Oct 6
2:42 pm

Keep in mind that having a line of credit with a card issuer is a privilege and not an obligation. You shouldn't take on more debt then you can afford to, and you have to be responsible in paying it back. By paying only your minimum payments, it makes you more of a credit risk in the eyes of the card issuer, because it means you don't have the necessary funds available to pay back your debt sooner. For instance, since I always pay my bill in full every month, I was late by a day on one of my payments and simply sent an email to the credit card company and they resolved the issue and didn't charge me a late-fee because they saw that it was a fluke and that I'm not a credit risk (with low utilization and 100% ontime payments). It's all about how long it takes you to pay back your debts.

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