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)

corba504
Sep 20
7:20 am

it is a good article

r59432
Sep 7
7:22 pm

I have a credit score of 794 and a credit utilization of 0%. How is it possible that I have a 0% utilization? I utilize my card every month, and average $2-3K per month. Last month, it was $6,000. I have very high credit lines, but I don't see how I could possilby have a 0% utilization ratio.

CK Moderator

It depends on the timing of when your credit card company reports to the bureaus. If you pay at the same time each month and they report at the same time, it could be zero. Another explanation is that your issuer may not report to TransUnion.

lark77
Sep 7
11:46 am

I've seen multiple posts on here that express concern about keeping credit card utilization above 0% while not carrying a revolving balance. At least one person indirectly offered a solution to that, but I'll reiterate it.

The amount of credit being used on an account is shown on the credit report as the ending statement balance of that account. It follows that the ending statement balance has to be greater than 0 in order for a credit line to be shown as utilized. Once the next statement begins, the balance can be paid in full, and no interest will accrue. It's all about the timing of the payments. A credit account can have NO balance whatsoever for 29 out of 30 days in a month, however just as long as there is a positive balance on the account on the day that the statement ends, the credit report will show that balance.

My girlfriend has no credit history whatsoever, and we've struggle with trying to build up her credit so that she can qualify for a mortgage. The challenge is that it's hard to get credit with no credit history, especially if you don't want to pay for it.

Fortunately, I think we've found a solution. I have several open credit card accounts, and I learned that I can add her as a joint owner of the account. The best part for her is that it doesn't require a check of her credit, so she shouldn't have a problem getting approval. It also doesn't require a check of my credit. That's a big issue for me since I'm waiting for multiple hard inquiries on my credit report to expire so that my score can rise above the magic credit score of 760. Adding her to one of my accounts, particularly an account that I'm not utilizing, will help my credit score because her use of that account would further increase my credit history. We just have to make sure that she doesn't over-utilize the credit.

firegod94
Oct 8
8:21 am

I thought they just passed it so that people could no longer add people in order for that person to raise their credit?

CK Moderator

The changes are based on the scoring models used. It still varies at this point.

psugar
Sep 5
1:05 pm

I carry no balance.....zero, ever. But I get ranked an F because it says my utilization is high. Is this because I put all my business expenses on AMEX and pay it off exactly on time every month?

I also max out the Discover because they have the best cash back. Again no balance ever.

I use the cards for everything because on average I get back 1 to 2% which is a huge amount for me....never paid for a vacation, or for most things like HomeDepot where you can get gift cards.

CK Moderator

Yes, generally your score could see a boost if you had more available credit.

khp3655
Aug 29
8:23 am

Over the past couple of years I have had my account numbers changed due to suspicion of fraud (not that there was any) or compromised account numbers or whatever ... all done by the issuing company, not me. It seems that when this happens the accounts get reported as new accounts and the account history (I have accounts that have been open for years that are reported as being open for 6 months) is lost. That seems to reduce my credit history time. Is there anything I can do about this?

CK Moderator

Not much you can do about it. But keep in mind that most lenders will keep your account open dates and just transfer your account number. That should help.

jlarocca
Aug 29
5:18 am

My credit score on 8/29/09 was 785. My "Total Accounts" Grade was "D". What do I do to move this grade higher?

CK Moderator

That is a very strong score. With it, you should get the best rates available. Over time, your total accounts should increase with more credit experience.

lennyschafer
Aug 20
1:26 pm

Having open credit card accounts you rarely use or need may raise your credit score but it also increased your exposure/risk to identity theft.

aprilkeckler
Aug 19
3:45 pm

Our current amount owed by HSBC is $4,000. If we send them in $2,000 will that raise our credit score quickly? They have also lied and said we were 60 days past due when we never were and it dropped our credit score by 30 points!!!!!!!!!!! We definitely do not recommend them.

CK Moderator

It really depends on how much of your credit you are currently using. Try the Credit Simulator to get a sense of the change.

raymoore98
Aug 19
2:44 pm

I am planning on buying a house late this year, so I pulled my credit and was shocked to find my score much lower than I would expect. It turns out that 2 of my 3 cards do not provide my credit limit to the credit agencies. This has made by utilization look high and available credit look paltry. They will be hearing from me on a daily basis until they get their act together :-)

chinatiny
Aug 18
5:32 pm

What credit bearu score am I lookinga t on this site. Is it the middle score that the lenders look at? It seem as though the other score do not matter I am trying to get a home loane my other two score are 590 and middle is 533. Even though the other two scores are higher they go by the middle score is this what I looking at on this site?