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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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I have many unused retail cards from department stores and home improvement warehouses. How would my score be affected by closing these accounts?

Reeser 1 year ago

We have this answered in our credit Q&A section

CK Moderator

I think I understand the concept but flag me if I missed it? I have a 734 that doesn't seem to go up. I also don't have any credit cards, other types of credit, yes, but no plastic. So to move my score up I should apply for a card, use less than a third of it and keep it paid off? I want to buy a car in 4-6 months and get an amazing rate so I am wondering if the time frame would help or hurt my score if I applied for plastic now.

COMEON427 1 year ago

Revolving credit i.e. credit cards are a good way to build your credit. Having a few credit card accounts can help your credit score. Just keep in mind that you score may drop with the credit inquiry but will go back up over the next couple of months.

CK Moderator

My credit score absolutely stinks!! I have a 545.. UKkkk!!!!! I have a repo of a vehicle on my credit I've tried to apply for credit cards and seem to have no luck. The vehicle that got repo'd had a 28% interest rate tied to it in early 2006 I paid for it until late 2008 and I lost my job resulting in the unfortunate turn of events.

mdpittman015 1 year ago

I understand that it is important to keep utilization low, but I am trying to build my credit limits faster so that I use them for bigger purchases without making the credit utilization too high. Does utilizing a larger share of my credit line help boost my credit limit faster? In my case I have a credit score around 730 and 4 credit cards that I've had all less than 3 years at limits of about $1,000 each. Yet my credit line increases are very small $250-$500 every year or so. How can I boost my credit line faster?

bprice 1 year ago

Is it suggested that I have credit utilization when I own two homes with mortgages and a student loan? I have six credit cards with 0 balance.

itsjusmeandu 1 year ago

If I utilize my credit card every month, but, pay it off every month then my utilization is 0? So, should I let a balance stay on a month before I pay it off to show a utilization rate? Is this a better way to increase your credit score as opposed to paying off your card every month?

ANGEALA75842 1 year ago

Paying off your credit card every month won't produce a 0% utilization since the charges that you continue to make will keep your account from ever being 0.

chief0 10 months ago

This is the closest thread I could find relating to my question: My credit score of 746 seems to be mostly affected by the "D" I received in "Total Accounts" in Karma's Credit Report Card. The report card says I have 20 accounts with 11 being open. Is my credit score hurt because I have too many accounts or not enough? (Report card says, "total number of credit accounts affect your credit score." I have a mix of mortgages, 4 major credit cards, overdraft, car loan and one store credit card - all with a 100 percent payment history. Is this mix unfavorable in some way?

johnestonko 1 year ago

That is a good score. Don't worry so much about the lack of total accounts. Users should focus on on-time payments, ccu, and credit inquiries as active credit management. More accounts and longer history will come in time.

CK Moderator

My score is 655 yet I've been denied 2 different card applications for what your compare thing says are for good to average credit scores. My report says my biggest problem is not enough accounts open. I feel I am at an impasse. What would be suggested?

mmckim 1 year ago

We are seeing credit card companies require higher credit scores across the board. Mid 600s is becoming a marginalize score range. Check out the Orchard Bank card if you are looking for a strong credit builder.

CK Moderator

The article is very informative. I have total of 5 revolving accounts including Credit cards and Store cards having a total credit limit of $7400. My total credit history is just a little more than 1 year, with average credit card age being just 7 months. I am also having 11 hard inquiries on my credit report in the last 1 year period. But still, I have managed to attain a score of 723 because I keep my credit utilization below 30%. But 1 question that I am still having in my mind is that should I use all of my card accounts every 1 or 2 months, or should I use a couple of them and leaving the rest with 0 balance? I would prefer the 2nd option, but is it going to have any negative effect on my credit score? Please advise.

ashmaini 1 year ago

In this economy, many credit card companies are closing inactive lines. Using cards every couple of month on necessities is our recommendation to help lower the chances of having your account closed.

CK Moderator

Can i benefit as a first time home buyer,even though i co-signed with a friend on his mortgage of $671000. But this friend never late in paying this mortgage. And my credit score is between 732-740. And i have a down payment of in between $5000 -$10000

dara07 1 year ago