Credit Card Utilization and Your Credit Score

Credit Card Utilization and Your Credit Score

Credit card utilization refers to how much of your available credit you use on a monthly basis and is a metric often used in credit scoring algorithms. It is defined as your total open credit card balances divided by your total open credit card limits. The resulting percentage is a component used by most of the credit scoring models because it is often correlated with lending risk. Generally speaking, the higher your credit card utilization, the lower your credit score.

Why does it impact my credit score?

The utilization rate is an important indicator of lending risk. A person who constantly charges all of the money they can, hitting or going over their credit limit, is far more likely to have difficulty repaying that money than a person who uses their credit cards sparingly.

How does it impact my credit score?

As there are dozens of different credit scoring models, it's difficult to calculate exactly how credit utilization will impact your credit score. However, there is a strong correlation between a consumer's credit card utilization rate and their credit score. Those who keep their utilization percentage low (but above 0) on average have higher scores than those who constantly max out their credit cards.

High credit utilization on a single credit card could negatively affect a consumer with little credit history and only one card far more than it could someone with multiple cards and a long and excellent credit history.

Although it is an important factor in calculating your credit score, it is important to remember not to just focus on this one aspect of your credit score. Keep the big picture in mind.

How can I lower my credit utilization?

Here are three tips that may help you lower your credit utilization. One tip is to make credit card payments more than once a month so that your balance never gets too high. If you have more than one credit card, another good way you might lower your utilization is to use multiple cards each month. This results in various cards with low credit utilization rather than one with high utilization. Lastly, you could try to increase your available credit. If your income has increased, if you've maintained an amazing credit history or if you have little debt, it doesn't hurt to ask for a credit limit increase. Just remember that this can sometimes result in a hard inquiry on your credit. If you lack excellent credit, you may want to consider opening a secured credit card and adding to its security deposit over time.

Other Tips

  • You do not have to carry a credit card balance or pay interest every month to show credit card utilization. Even if you pay your credit card balances in full every month, simply using your card is enough to show activity.
  • Experts recommend keeping your credit card utilization below 30 percent on each card and collectively. This shows lenders that you know how to spend responsibly and can help your credit score. However, creditors also care about the total dollar amount of your available credit, so if you have a low credit limit, it usually is not a big deal if your credit card utilization rate is slightly higher than recommended.
  • Although high credit utilization can be detrimental to credit scores, keeping credit utilization at 0 percent is not recommended either. Creditors want to see people who use their credit, but are able to manage it responsibly.

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All Comments

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4 Contributions
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Helpful to 3792 out of 3958 people

I use to be a mortgage loan officer. The way I understand it, you should only use 30% of whatever your limit is on any card you hold. If you have a limit of $1,000.00 for example, you want to keep your balance at or below $300.00. Totally ignore the real limit and treat the card as if your limit is just $300.

To avoid paying high interest, pay off all but $5.00 of your balance (or as much as you can afford) each billing cycle. Leaving a $5.00 balance will automatically register with all three credit bureaus that your manageing the card at less than 30% usage. Bottom line, never allow your limit to go over $300.00 /or 30% of your actual limit.  If you do this with each of your cards, you should have an "A" for credit card usage within a years time. 

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Reply by
EddyTX

1145 Contributions
2862 People Helped
Helpful to 1878 out of 1987 people

A good trick, once you are able to get on to multipul cards. 

I put a recurring charge such as netflicks or my pbs monthly donation on a card. Then put that card away. Only using occasionally through out the year. Then set up a recurring payment to the account for a little less than the balance due. 

When you use the card for something else. You can pay that off.   The card will show activity and keep the balance low using money you are already spending. 

Reply by
Tuffkat4050

1 Contribution
251 People Helped
Helpful to 251 out of 290 people

Leaving even a minimal amount of your balance unpaid results in paying interest on the entire balance for the most of the billing month and often the following month too, because your balance due is never zero-balanced. On balances that are not paid in full, interest accrues from the date of the charge until the charge is paid in full and all already billed (showing on a statement) charges are paid in full. Pay ALL of the billed balance due by the due date if possible. You will still show credit activity that builds your credit score but will pay ZERO interest. It's a bank's dream for you to pay all but $5!

Don't charge it if you can't pay in full by the billing due date!

3 Contributions
1051 People Helped

Helpful to 1040 out of 1100 people

I'm not sure where you folks get your information that says you have to leave a balance on any credit card. A year and a half ago I had never owned a credit card my entire life, however I had a lot of collections for medical since I didn't have insurance. There was close to 25k worth of this. I paid quite a few of them in full and settled about 5 that still show on my credit report as settled in full. No company would give me a credit card. I started with a 572 credit score and by the time all of my debts were paid or settled, I had a 620 credit score. I had to get a capitalone prepaid card. After a few months I applied for Bank of America and they denied me even though I bank with them. So what I had to do with Bank of America is give 500 cash as a deposit. So my limit was 500, then six months later I called them and asked for a real credit card. They finally approved me and gave a 1k limit. After 9 months of using that and the Capitalone.. I was approved for Chase Sapphire. My score had raised to a 705 with a 5k limit.

My wife had zero credit and I had her get a credit card. She started off with a Kohls card to establish some credit. About six months later she had a 720 credit score strictly because of that card, and later she got a Bank of America, then after a few more months her score raised to 750. She then applied for Chase Sapphire and got a 11k limit.

The point of this story is.. my wife and I pay our credit cards the same day we use them. We never wait until the due date and we never carry a balance. My wife has a 780 credit score and I now have a 705. My advice is do not fall into the carrying a balance trap. It's not needed.

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Helpful to 921 out of 1012 people

It required  YEARS for me to get all my credit cards paid down to zero.  I cringe when I think about all the money the credit card companys extracted from my wallet in interest fees.  I now am debt free and I have five no-fee credit cards and I pay off all balances in less than 30 days - and I must laugh when I see a 'C' grade for my 'credit card utilization' grade on my credit report.  I pay off my balances on time and get a 'C' ... and if I DON'T pay off the balances quickly I get an 'A'...pah-leeze ... I'll stick with my 'C' grade and NO debt...I sleep better with the 'C' ... 

Reply by
expatbrit

5 Contributions
345 People Helped
Helpful to 343 out of 403 people

I know what you are going through with that. I naver carry a balance on my vredit cards but also get a C rating as my utilization is always zero and to the credit reporters computers 0=100 lol. That's why you and I will never get an A as we don't like to let them rip us off with interest charges ;)

3 Contributions
213 People Helped

Helpful to 204 out of 220 people

   I have had a Capitol One card for 2 years now. I use it to pay several of my bills, and 95% of all other purchases;. I have only had a $0 balance twice in the last year. Yet, I have paid $0 in interest, and have cashed in over $100 in rebate credit this year. That means they have paid me over $100 to use their card. 

   I do this, because I make a payment every week. The rule is: Every purchase has a grace period until the due date following the 25 day minimum . So as long as no 1 purchase makes it to its due date, there is no interest. Basically, I average $1000/mo in transactions, so I pay them $250/wk. This means I always have a balance to report, but I never pay interest. They have also, increased my credit limit twice in 2 years.

   I also have a Chase card that I quit using, so they lowered my limit and increased my interest rate. So, for that card, I started using it for my netflix bill. I let it sit for a month so they could charge me interest on $8. Then I paid my balance minus $5 every time my card was billed. After I cancelled Netflix, I started making one purchase per month, and I pay all but $10-25. I let them charge me interest on that. Then, I use it again and repeat. They have increased my limit again, and always report a balance. It cost me about $10/yr in interest. 

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119 Contributions
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Helpful to 659 out of 704 people

I learned my lesson about the high utilization on a single card the hard way. After building my score up to over a 750 in just 7 months (over a 100 point increase), paying off 2 credit cards in full, I got those 2 cards to give me a great balance transfer deal (0% for 12 months). My third card has a terrible interest rate so I did the balance transfer to my two cards, and although my overall utilization rate is actually lower due to payments I have made, my credit score tanked 76 points practically overnight.  Never do a balance transfer that will leave a single card with over a 90% utilization rate even if your overall rate is good. Luckily I had the money to get the rate under 90% immediately, but watching my score tank 76 points really hurt haha, especially when you have to wait weeks for your due date and the new balance to report.

The advice in the CK article mentions single card utilization rate impact referring to those with little credit history; however, I have a long and overall good credit history and it still tanked my score 76 points, so do not feel comfortable with that advice they gave, no matter your credit history...it hurts.

1 Contribution
140 People Helped

Helpful to 140 out of 149 people

What I've learned more than anything in the almost 20 years I've been on file with the bureaus is, KEEP YOUR OLDEST ACCOUNTS OPEN even if you don't intend on using them.  They are your proverbial stake in the ground when it comes to "credit history."  Replacing those accounts with new ones is entirely permissible, just don't close them in the process, at least not without realizing the consequences.

Additionally, I can't agree more with the fact paying off your credit cards each month is strongly advised.  The bureaus need to see there's been activity on your account, but it's not as important to them if you choose to carry a small balance.  Paying interest just to play that game is unnecessary and ill advised.

Finally, don't get caught in the cash rewards trap unless you've planned well ahead.  Have a clear cut strategy if you're going to get involved in points/cash back, or else expect to overspend just to "earn" your reward(s), even though spending less and keeping your own money in the bank instead of with the CC companies would have been a wiser choice.

Spend less or save more, and you'll do all right.

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