Credit Card Utilization and Average Credit Scores

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.

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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