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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All Comments

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What credit bearu score am I lookinga t on this site. Is it the middle score that the lenders look at? It seem as though the other score do not matter I am trying to get a home loane my other two score are 590 and middle is 533. Even though the other two scores are higher they go by the middle score is this what I looking at on this site?

TransUnion

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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@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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Helpful to 1 out of 2 people

If I am trying to rebuild credit, what is the best way to do so? At this point in time I've got two credit cards, one of which is paid in full and never used, the other is used nearly daily but never carries a balance. How can I effectively use these cards to help build credit?

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Correct me if I am wrong, but I understand the utilization as the average balance on the card. For example, I pay my bill in full every month, but any given day of the month including the day after I paid of the balance, I have about 15% utilization even though I pay my bill in full.

Reply by
stevesnake

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From my experience, if you pay your balance in full at the end of every due date, your reported activity for that card each month will show a balance of $ 0.  The reason for this is that the credit grantors only report to the agencies ever 30-60 days. (Usually at the begining or end of each month)  If you start with a zero balance and end with a zero balance, the credit scoring agency never knows what purchases/credit usage took place during the time inbetween.  This can actually have an adverse or more so, a nuetral effect on a score.  Without activity, there is little "track record" to base a score on.  The score can be considered a "report card" of payment history and ability to manage ones funds.  Taking out a loan (secured, non-secured, revolving etc.), and paying it off over time is actually better to improve a score than it is to take out a loan and pay it off right away.  This will build a "track record" and a "strong" score in addition to just raising the score.

Reply by
CuriousOne2012

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"From my experience, if you pay your balance in full at the end of every due date, your reported activity for that card each month will show a balance of $ 0." 

This hasn't been the case for me.  I have only one credit card by choice and pay off my balance every month by the end of the grace period.  I've been doing this for years, yet I still received a lower score for 44 vs. 30% utilization.  What gives?

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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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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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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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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.

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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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.

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