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)

sdlkc1
Aug 13
5:45 am

my score is in the mid 700's and all grades are A except this utilization one which is an F. I confused as I pay off my cards monthly of course and only significantly use amex or MC. I dont nearly hit my limits or even use 90% of my cards. thoughts

CK Moderator

Credit card utilization is based on the amount of debt at a given point in time. The fact that you pay in-full each month is not distinguished. Chances are your score could see an increase if you added a credit card or increased your existing credit card limit.

chrisf
Aug 11
1:21 pm

I had a credit score in june of 09 at 584. i applied through four different people to help rebuild my credit in a home building process. Now when i checked the infor from credit karma it shows credit score of 573. Is this information accurate coming from transunion? Also, when opening up new credit card accounts how long will it take for your credit score to go up if you are paying tour cards on time?

CK Moderator

The amount of time depends on your specific details. You can try our credit score simulator to get more details.

internate
Aug 1
10:18 pm

Great info. Thanks for the insight.

excelsior
Aug 1
8:19 am

I charge everything on my reward credit card and pay my balance in full every month. Sometimes the balance is in the thousands and if my credit is pulled at that time, my score drops. There is no record that I pay the bill in full. Also, my income is not known and so I believe my score is lower than it should be. IS there a way to circumvent that?

CK Moderator

Income is not factored into your credit score so that won't matter. As for you monthly spend, if your credit card limits are high enough, that won't matter either. However if your limits are $5,000 and you charge $4,000 each month then your score might be artificially low.

turtlecam
Jul 24
9:03 pm

Excellent advice. Thanks I will be back and spreading your great website with my business associates.

dara07
Jul 5
8:10 pm

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

ashmaini
Jun 25
1:13 pm

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.

CK Moderator

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.

mmckim
Jun 16
4:14 pm

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?

CK Moderator

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.

johnestonko
Jun 10
6:01 am

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?

CK Moderator

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.

ANGEALA75842
Jun 8
4:02 pm

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?

chief0
Oct 9
8:53 am

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.

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