The Relationship Between Your Credit Score and Credit Card Utilization Rate

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The Relationship Between Your Credit Score and Credit Card Utilization Rate

Credit card utilization is one of the most important factors credit scoring models use to calculate your credit score. You can figure out your utilization rate by dividing your total credit card balances by your total credit card limits.

To illustrate how important this factor is, Credit Karma sampled approximately 15 million Credit Karma members who visited the site in 2014 and compared their credit scores and corresponding credit card utilization rates.

Credit Score Chart

Findings

The graph above suggests that there is a strong correlation between credit card utilization rates and credit scores. Generally, those who had a lower utilization rate had a higher score and vice versa - with an exception for those with 0 percent utilization. The average credit score of those who had a utilization rate of 0 percent was actually lower than the average score of those who had a utilization rate of 1-20%.

What Does This Mean?

Lenders don't like high utilization rates because it tends to indicate there's a higher chance of you not being able to repay your debts. Keeping your credit card utilization low, preferably under 30%, is a good goal to aim for. Our data suggests an even better goal is to use your credit some, but keep the utilization rate under 20%. Creditors want to see proof that you can manage credit wisely--something you can't do without using the credit you're granted.

If you're uncomfortable with the idea of using your card for large purchases, you can still show an active credit profile by paying for small items with your card. It's important that you practice good habits when managing your credit cards. Charge what you can pay back and make sure your payments are on time. In order to keep your utilization rate greater than 0%, you'll need to let your charges show up on your billing statement, and then you can pay it off in full. This does not mean you need to carry a balance from one month to the next--doing so may just cost you money in the form of interest.

One of Many Potential Factors

Your credit card utilization rate is an important part of your credit profile and will likely have a significant effect on your credit score, but it's not the only factor lenders care about. The data and graph above represent the average, meaning it is possible for a person with high credit card utilization to still have a good credit score if other factors are positive-- it's just not as likely to happen. You can monitor your credit card utilization rate (and more!) for free at Credit Karma.

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4 Contributions
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Helpful to 365 out of 408 people

I believe I'm the odd man out for I have a C for my total credit utilization yet have a score of 790 on Credit Karma, the other 2 companies have me in the 800+range which says the system is flawed. If I won 10M from the powerball my score wouldn't change, even though I would be better off, I'm better off now because I have no debt, yet partially penalized, but I don't worry about my FICO score, because I'm able to use cash.

i think credit karma is 100% fantastic I live it and recommend to my friends because it can help a credit challenged person

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Reply by
CKCharmaine

512 Contributions
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Thanks for your kind words!

Reply by
TL2012

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Enter Your Reply This is absolutely true! Only CKarma was able to provide the RIGHT advice to turn things around. You must read everything meticulously and repeat your visits to review tips you may overlook. If you learn and follow you will be anazed! Ither sites do NOT compare.

Reply by
bulky

1 Contribution
7 People Helped
Helpful to 7 out of 20 people

I only have two credit cards and it's listing three. What's up?

Reply by
MrWish

1 Contribution
1 Person Helped
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if you win 10m can u borrow me some$$ lol

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34 Contributions
780 People Helped

Helpful to 238 out of 254 people

I read a gazillion articles about credit, utilization, improving credit etc. I will give you my take on my personal experience. I believe yes, there is an algorithm but I believe that it differs from person to person and your credit habits, problems, financial situation, etc. So each credit report is unique to a person and what you do in terms to increasing your score is up to those "components" from what I researched and found out that there are over 200 different things are being looked at job, residence, payment history, accounts, etc. They all will differ from person to person.

6 years ago I fell into the credit slump the entire country was in, 2 cars repo'd, collections, etc. My credit was shot to a like 510 or something. So the last 4 years I started picking up the pieces to rebuild my credit.

To start I took out a loan at a buy here / pay here lot that reported to Equifax at 22.9% APR. Orchard Bank was kind enough to get me an unsecured card for $300. I then was approved for a BofA secured, then went to Wells Fargo secured and Fidelity. So now I had a car loan 3 secured and 1 unsecured card with hardly any limits.

I did the whole 10% utilization game by paying multiple times a month and always PIF before statement date. Did this for about 12 - 15 months. I got BofA to unsecure my card, change to a rewards card. I got a Cap 1 blank check pre approved auto loan for $30,000 but when I went to the dealer they beat that rate with GM Financial for 2% lower APR and less money down. So I took it, then bought a second car with the Cap 1 blank check.

Now I paid about 8 months. I then went on a app spree applying to as much cc as I could to see what I could get, yes I was a little methodical about it but I got approved to about 10 CC's

Barclay, Cap 1 Quicksilver one, Cap 1 Spark, Nordstrom, Macy's, Amazon Store, Fingerhut, and now Walmart and Target Red credit card. My Fidelity unsecured after 10 months (their policy is to review after 15 months) and they added $250 plus removed annual fee.

When I got approved for my Target, Walmart card I had 23 inquires on my report on Equifax, about 10 on TU and about 16 Experian. My current score are about 646, 648 and 656 between the 3.

What I found out for myself that banks look a lot at your credit management, payment history is one part of it but how you used the cards. Does your spending pattern indicated that you are desparate for money or if you have a lot but the limits are just too low. What I mean by that. I let my utilization go up on several cards to about 70% and let it report to the CRA. Then paid most of them to 0 and the other down considerably. I did this with all my cards and in different patterns.

This is where I found my biggest jump in credit score at one time +10 at once.

My fingerhut account I have a CL of 1200 carry a balance of 700 (min payment $46 but I pay $100)

Most of my CC have a $1000 CL so on a few I reported a $700 balance, $500 balance, on my $500 CL card I reported a $280 balance, Amazon $400 reported $248 and so on.

yes my credit score tanked by like 3 - 6 points but the next month it shot up when I made the big payments on all of them.

So my moral to the story is that everyones credit and financial situation is unique dependent on countless factors but what I gathered is that if you use your credit in a pattern that demonstrates that you use it only to avoid to pay cash but you actually have it. They will extend you credit. You can show it by making multiple payments per month but charging frequently. It will show a pattern that you know exactly what you are doing.

Utilization, Inquiries, all of it matter in a the grand scheme of things but I think what really matters is the big picture because ulitmately that is what the credit report is suppose to give a lender - the big picture - are you a responsible borrower and do you know how to manage your money. If you only pay a little bit and charge a lot shows the bank you over extent yourself, if spend frequently and make lots of payments display the banks that you simply just using your credit as a tool but really only spend the money you have cash and then just pay it of.

I work in technology so I can say with confidence that banks use technology for risk managment. If you ever look at some of your credit reports, they also report what payments you made, how many time per month, what you high credit was, when you made the payments (in my case they will several per month), how much money you make, what type of credit you have. So if Bank of America gives you $1000, it may signal to another bank, if they give you credit then they may should give it to you too. Nordstrom asked me to give them a valid CC# to verify my identity but I think they use it assess your credit as well.

So the big picture is to prove to banks, that you do not NEED credit but you use it instead of your cash even though you have but you prefer to may lump sum payment. Ultimately these banks make money off each and every swipe you do at the stores which means money to them. You not using that them and not that often is no benefit to the bank. you using them all the time, allows them to make lots of money. The interest they charge you by carrying balance is just a secondary stream of income!

Reply by
JCjim

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Helpful to 18 out of 20 people

dbat, Very interesting perspective, and some things I never consdiered. Your take on the "mysteries" of  scoring alogorithms make a great deal of sense - certainly, these seem to have worked out well for you. 

Reply by
jls53

8 Contributions
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Enter Your ReplyA lot of what you say is true, but I believe the rating system keeps the average scores lower, so the banks make more money in interest. I see credit for most people, is just a trap to lock you into making monthly payments to the banks each month. I have taken on $8,000 in credit card debt over the last 8 years, after a bankruptcy, high medical bills.   I have never missed a payment and have watched my credit score yo-yo. I received credit card ofers of 14-18% right after bankruptcy. Now the best I get is 22%, most are 24-27%. even thought my score is 100 points higher @ 635. The only car loan I can get is 17%, are they crazy on a secured loan? No way. I have not had a car loan since 1986 and I am sure that is hurting me, but the banks do not care. I have purchased 8 cars since 1986, all for cash. I will be paying off the credit card debt over the next 18 montrhs and will never have more than 0 to 20%. My advice is keep CC debt below 20% and only use credit for a car or house period. That will allow me to bank 50% of my social security when I start drawing in 2.5 years and live on my pension. Experts say wait until age 70 to get SS, because you get a bigger check. I will get $60,000 from age 62-66 and have $30,000 in the bank. And from age 66-76 I will be saving another $75,000. Then I will not need credit for anything.   

Reply by
Doug1as

2 Contributions
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Thanks for your insight Dbatl2012. I just wanted to expand and share some issues most people don't know about. i used to own an electronics store and many years later I sold it. The reason banks LOVE you for using their cards frequently is because the STORE has to pay between 2% and 4.5% when the card is swiped. Corporate cards are even worse and add 1% or 2% more to the transaction. Discover and AmEx are both extremely high percentage cards. That's why you often see stores, especially small ones, that only take Visa and Mastercard. The percentages don't sound like much but for example: your purchase is $100 and the corp. card charges the store 5%, the store just paid $5.00. Now your purchase is $1000 so the store pays $50.00. Then your CC adds salt ot the wound and charges you interest. Set your cards on autopay for the minimum if you have to or if you have problems keeping track of due dates. If you want to pay more then go for it. If you can't add any extra then you just let your CC autopay do the job for you. Of course you're paying the minimum but you don't ever have to worrry about forgetting. If you don't have the money to pay the minimum and you don't want a bounced transaction added to the mess, then just turn off autopay. The autopay option is only for those who pay online but it certainly helps if you tend to lose track of the days and you have several cards. I hope this helps people understand one of the reasons your CC wants you to use your card as often as possible. You can help the smaller stores out if you're paying with your Debit Visa or Debit Mastercard. If you use it as a Debit Card and just enter your PIN, the store will only have to pay $0.25 to $1.00. NO! THE STORE DOESN'T AND CAN'T KEEP TRACK OF YOUR PIN. There are tons of laws against that and the PIN NEVER shows up on any report the store has. Please don't make the "Small Guy/Gal" pay 4% when it could only cost a quarter. Support the small stores when you can. Thanks and good luck folks!

Reply by
Etiennej7806

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Helpful to 1 out of 1 people

After reading your post, I found a lot of things you wrote that made sense. Especially, having multiple credit cards and to make sure to pay more than the minimum. Another tip I wanted to add to what you said about charging on cc and carry over balance. Believe it or not,  the bank prefers not to have a big balance carryover every month on your credit cards. Having 70% Card utilization is too much.  If you keep a maximum of 10% Card utilization on your cards every month your score will jump significantly. yes paying in bulk and making multiple payments within the month is great but make sure those payments are made before your due that same month  of purchase not after. I've done it and it works. I went from 483 BS to  608 BS within 21 days the next month I had an additional 40 points. I have helped many of my friends and they suggest that I become a credit specialist but I'm not in it to make money. I just like to help people. Mostly all my family members BS are in the 700's. Of course, there are some other factors that you most take into consideration when building credit includes making payments on time, the length of credit history, credit limit, and etc. However, this one considered to have the highest impact on credit. Good luck guys!  

Reply by
sunshine7028

2 Contributions
0 People Helped

Thank u for that! It makes more sense to me now ;)

Reply by
Smooth75

1 Contribution
0 People Helped

I am excited to hear this because I just lost 6 points for running up my utilization but I just paid it all off the following month so I hope to see some type of spike!

Reply by
dcrewsing

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0 People Helped

Enter Your Replyyou should start a blog friend ! Thx for the advise!

8 Contributions
42 People Helped

Helpful to 13 out of 14 people

Look, credit is a tool. Tools must be used properly. If you want to use a credit card to make a large purchase, relative to your credit limit. go ahead. Just pay off most of that balance BEFORE it appears on your monthly statement. Want a higher credit score? Keep your monthly usage on each and every credit card greater than 0%, and less than 10% ON YOUR STATEMENT. Is it a game? Yes. Can you win? YES!

Reply by
earlyriser53

8 Contributions
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Helpful to 12 out of 12 people

Follow up: After keeping my credit utilization under 9%, paying off my balance every month, I got an increase in my credit limit (from $300 to $600) without asking, and just got my February credit score -- 707! Play the game by the rules and you'll win.

Reply by
PM412

1 Contribution
1 Person Helped
Helpful to 1 out of 1 people

Thanks for the advice. I thought if you make a payment on your statement then it will help your credit score. I made a big purchase on my credit card and had no idea if i didnt pay back more than half of it then my credit score would drop. I was always told that lenders want to see you pay the balabce off over time and not just all at once. You comment was a big help. If i pay the remaining balance off how long will it take for my credit score to go back up?

1 Contribution
5 People Helped

Helpful to 5 out of 5 people

This system is flawed.I had 0% utilization and had a score of 830 then to cross check i charged a lawnmower with 0% interest for 24 months on a credit card a $3200 purchase which brought my utilization up to 4%. Then guess what my credit score DROPPED to 810. Take my advice dont charge on credit cards if you dont need to it goes against your score and it will ALWAYS DROP!!!!!

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Reply by
JohnnyRain127

1529 Contributions
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Helpful to 9 out of 9 people

If you aren't going to use your high credit scores once a while for your financial benefit then what's the point of having and maintaining an high scores? I personally much rather take a 20 points drop to have 0% for 24 months, simply because my score would rebound as I pay down the balance but I won't get the interest back if I didn't taking the advantage of my high scores. 

2 Contributions
5 People Helped

Helpful to 4 out of 4 people

Wow, so many useful scenarios, thanks for sharing everyone!

Personally, I have improved my score by 120+ points in the last 10 months using credit karma. I realized they wanted less credit utilization so I applied for 4 cards with high credit limits. My limit is so high I do not think I could consciously spend more than 20%.

My technique is charge everything to my cards and do a bank transfer to pay most of it off. I keep my grace periods in mind. I pay everything off before it accrues interest but keep enough balance to show 2% utilization. So far it's working out for me, I currently have a 740 and 750. That is about as high as I have ever had it. I'm really glad I am able to keep an eye on it. If you’re starting out don't be discouraged, I had to log in every week and check for positive reinforcement and negative outcomes before I reached a "credit behavior schedule" that gave me results. Yes, I said schedule, this is a serious routine!

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