Every credit score improvement article suggests that consumers should not have a high credit card utilization rate, defined as your total credit card balances divided by your total credit card limits. Often, the recommendation is to keep your credit card utilization rate as low as possible, preferably never exceeding 30%.
At Credit Karma, we think that it is important to provide both the recommendation and the reasoning behind the recommendation. Therefore, we took a random sample of 70,000 credit scores and their corresponding credit card utilization rates and graphed the results. The findings are very telling and support the claim that on average, the lower your credit card utilization rate, the higher your score--except for 0% utilization.
The data and graph suggest that there is a strong correlation between one's credit card utilization rate and their credit score. In general, the lower the credit card utilization, the better the credit score.
However, there was one exception: the average credit score of those who had a credit card utilization rate of 0% was actually much lower than those who had a utilization rate of 1-10% (745 vs 678).
This is likely because people with 0% credit card utilization usually fall into two 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 cards, if only on small purchases, to show an active credit profile with positive payment history.
(Sidenote: This is why Credit Karma members who keep their balances and credit utilization rate at 0% receive a "C" on their Credit Karma report card for the "Open Credit Card Utilization" section. The grade is determined by the average score of users within each range.
This does not mean that all users with a low grade in one particular metric will have a low credit score, but that *on average* users within that range have a lower score. Please keep in mind that these credit grades will help you evaluate your credit health, but the letter grades will not affect your score.)
With the results of our findings 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. Creditors want to see people who use their credit, but are able to manage it responsibly. Keeping this in mind, we suggest keeping your credit card utilization below 30 percent on each card and collectively. In addition, make sure you pay your balances on time and that the debt is something you can manage.
The Wrong Conclusion
For the casual reader, it is important NOT to infer that the credit card utilization rate is the only driver of credit scores. In reality, there are hundreds of attributes. 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, suggestion that they are indeed more risky. Or perhaps the high credit card utilization is a result of a credit card company reducing their limit because the individual is taking on too much debt. In many ways, credit troubles can built on themselves, so it is best to always actively manage your credit and make responsible use of the credit and credit access you have.