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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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Comments

(76 Total Comments)


Wait, so let me get this right, using your credit card too much is actually hurting your score even if you pay it off each month in full? I have had my card credit from bank of america for 4 months now I max it out to its limit every month and pay it in full each month and my score is only a 635 and I am 20 years old, can anyone help explain please?"

skyhigh37 at 9:26 pm Mar 8

Reply

You have it right. Using too much of your limit is bad. Credit card companies don't report if you pay it off in full each month. They simply report the balance. So if they report on the day when you are maxed it could be bad for your credit. The rule of thumb is to use less than 30% of your limits. If you need more, increase your limit or get additional cards.

CK Moderator

 


Thanks for clearing it up for me bro."

skyhigh37 at 10:29 am Mar 14

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How accurate the Credit Simulator works in CreditKarma?

Did any one followed and compared their credit score.?"

dsatya99 at 9:21 am Feb 26

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I've recenlty been approved for a secured credit card. YEA ME! How soon after will I see a change in my credit scrore?

cropchick at 7:09 pm Mar 4

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I compared it with other companies. Its about ten to twenty points high. They do say it is an average though.

cwinowiski at 12:53 pm Mar 6

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I have a "state tax lien" from 1997 showing on my credit report which was paid years ago. It seems to be affecting my credit score. Shouldn't this have been automatically removed from my credit history after seven years?"

bmaddox1146 at 12:53 pm Feb 16

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I would contact the credit reports and tell them it's beyond the statue of limitations. I recently did that with a couple of things, and they were removed!"

cropchick at 7:07 pm Mar 4

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I have a question but i dont know where to ask it.. first of all i am 24 and have been getting car loans since i was 18 i always pay everthing ontime and never have had late fees. I have 3 credit cards but only 1 that I use. I have 1000 in collections due to a hospital bill that should have gone to insurance. Fought with that but its still on there. Anyway my question is why is my score still so low? 617 is my score with having 5 car loans all of them paid off except my current one. My credit cards has been opened for 2 years and the two that I dont use about a year..."

queenici21 at 4:46 pm Feb 9

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You have to use your credit card if you have it or it will not help your score. Your collections is definitely hurting your score if you don't pay it.

CK Moderator

 


There is a percentage of your score that is tied to "depth of credit history". Your credit cards could be relatively new and not seasoned long enough. It sounds like your car loans are paid off quickly and/or are for small amounts (five in the last 6 years), this would also play into the lack of true depth of credit history. Your biggest drag is the collection, they probably update the overdue bill every month, purposely dragging down your score, they figure you will eventually give in a pay it. I personally would use tax return money and do just that. The 617 score will make a huge difference on your future mortgage options, better to have that collection behind you and your score will increase quite rapidly thereafter, opening better programs and interest rates."

tritchie at 5:25 pm Feb 16

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I had to medical bills go to collections a while back. I have since paid them in full and paid my credit cards down to 30% of their limit or less. Will those collections still hurt my score even though they are paid in full."

nategeil at 6:30 pm Feb 20

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why does the cc company keep sending me letters saying i can have a second card but doesn't raise the limit on the first one. Seems like they're just trying to get all those yearly fees again. how do i get my limit increased?"

tcahoon at 4:30 pm Feb 4

Reply

CC companies will increase your limit as long as you are a trustworthy cc holder. Factors such as paying the balance on time and having a low balance (under 50%) on your card are considered. Usually you have to contact your bank and ask for a limit increase.

CK Moderator



Credit Karma has me at 634, but Equifax and Experian both have my rating at between 680-720, how can there be such a large difference. I have credit going back 5 years, 100% on time payments and less then 10% credit card usage with no negative accounts. How can I be at 634 on here? How can I raise my score without causing hard hits that lower my scores?"

Combatvet at 2:18 pm Feb 4

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We use the TransUnion, Transrisk score. Credit scores vary among bureaus. If you feel that it is incorrect, you may want to check with them:www.TransUnion.com. For more advice on credit score, please see our credit advice section.

CK Moderator

 


I personally am glad I found this free service to get my TransUnion score. I pulled my credit from annualcreditreport.com and paid for TransUnion to give me my score and it was literally too high. They gave me a score on a 950 scale (not used in normal banking circles), totally overblown score and charged me to boot for the inaccurate score. Most banks look at tri-merged reports today anyway, they take the middle, throwing out the high and the low score. So someone always has to be low and in your case it is TransUnion, I wouldn't worry about it. Just make sure there is NO inaccurate information on the actual TransUnion credit report, even one medical collection for as little as $50 can make a big difference."

tritchie at 5:30 pm Feb 16

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My total credit card debt on CreditKarma is more than I actually owe on my credit cards. I was worried and looked at my credit report but nothing seems to be off. Why does CreditKarma have my credit debt higher than it is? Would my bosses credit card be counted? I'm not responsible for it, just an authorized user."

JeniseQ at 3:35 pm Feb 3

Reply

Generally as an authorized user, debt will also be accounted for under your total credit card debt.

CK Moderator



Let's say I have 2 credit cards. Card A has a $3000 limit and a $1500 balance. Card B has a $2000 limit and is maxed out. So between the 2, I have a credit utilization of 70%. Now let's say Card B gets closed but still has a balance of $2000... Does that still count towards my credit utilization? Or with it being closed does that mean it only counts Card A and is now 50%?"

rlvp at 7:06 am Jan 29

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It will still count because you still have debt with the card. it will probably lower your score as well because you have just closed an account. so you have 1/2 total cards which is 50%=F"

dina12 at 10:23 pm Feb 3

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If you have your debt spread evenly over different cards with moderate utilization on all of them, are you in better or worse shape than a person who has high utilization on one card and very low utilization on the rest?"

Histrix at 7:37 am Jan 12

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Spreading your debt is generally better for your credit score.

CK Moderator

 


i have read elsewhere that it makes no difference in the calculation of the FICO. Can the moderators expand on this in a new article? it would be helpful thanks."

janiesuper at 6:54 am Feb 2

Reply

great idea thanks for the suggestion.

CK Moderator



good article"

davinci at 5:29 pm Dec 26

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very good"

nessy65 at 5:33 pm Dec 28

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