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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I think I understand the concept but flag me if I missed it? I have a 734 that doesn't seem to go up. I also don't have any credit cards, other types of credit, yes, but no plastic. So to move my score up I should apply for a card, use less than a third of it and keep it paid off? I want to buy a car in 4-6 months and get an amazing rate so I am wondering if the time frame would help or hurt my score if I applied for plastic now.

Revolving credit i.e. credit cards are a good way to build your credit. Having a few credit card accounts can help your credit score. Just keep in mind that you score may drop with the credit inquiry but will go back up over the next couple of months.

Review by
CK Moderator

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2 People Helped

Is HELOC considered like a credit card for credit score calculation? I have drawn about 50% of the HELOC credit limit and pay the minimum required amount. Recently my HELOC provider dropped "Available amount" to zero, meaning I can no longer draw more from HELOC although the credit limit is twice the outstanding balance. How is this affecting my credit score? I could pay off some debt to bring utilization to 35% of credit limit, but I noticed that the Available amount continues to be zero.

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I always pay my CC balance(s) in full by the due date, but the accounts are considered to be utilized and it's adversely affecting my score. Also be aware that opening a HELOC or other loan/credit line whether you utilize the HELOC or not will lower your score (30-50 maybe even more points). It was a big suprise to me when I opened my HELOC.

Yes because reported credit card balances are based on the report day and not your billing cycle, you may show utilization even though you don't carry balances. If you are always at high utilization, getting more available credit will help your score.

With regards to a new line of credit, any credit application will affect your credit score. In most cases, these application inquiries will stop affecting your credit score within 60-120 days provided you aren't always applying for credit.

Review by
CK Moderator

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The credit utilization is calculated from data reported to the credit bureaus. Which is practically always when you get a new statement, and the amount will be the statement balance.

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My credit score absolutely stinks!! I have a 545.. UKkkk!!!!! I have a repo of a vehicle on my credit I've tried to apply for credit cards and seem to have no luck. The vehicle that got repo'd had a 28% interest rate tied to it in early 2006 I paid for it until late 2008 and I lost my job resulting in the unfortunate turn of events.

2 Contributions
12 People Helped

Is it suggested that I have credit utilization when I own two homes with mortgages and a student loan? I have six credit cards with 0 balance.

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0 People Helped

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?

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.

Review by
CK Moderator

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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?

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.

Review by
CK Moderator

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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?

Top Contributor

Reply by
chief0

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Helpful to 1 out of 2 people

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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@49resons: I don't think utilization means the same as carrying a balance. 0% Utilization means you really did not use your credit card at all. The other way round: If you have a credit card with a $10,000 limit, you use it for payments of $1,000 a month and pay off 100% of your balance at the end of the monthly invoice cycle, your utilization is still at 10%.

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