Credit card utilization and your credit score

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Credit card utilization and your credit score

By JENNA LEE

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.

 

Keeping a utilization rate of 30% or less is ideal for your credit health. [Tweet this]

 

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.

About the author: Jenna Lee is Credit Karma's Copy Editor. Although her specialty lies in creating witty post-it notes, she also enjoys sharing all the financial information she's learned since joining Credit Karma in February 2012. When she's not working, you can probably find her trying out a new dessert recipe or learning/perfecting any musical instrument she can get her hands on. Say "hi" @leejennaa!

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All Comments

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Top Contributor
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So this whole credit utilization debacle is an ongoing thing because for one, no one really knows it but a lot have an idea similar to the Google algorithm.

I spent a whole of time researching credit because I needed to fix mine. I started at a close to 500 score because of a bad 2 years in 2008 - 2009 but I managed to increase my score about 150 points in 2 years. I started with a bunch of secured ones, got an Orchard bank one. I did the BofA, Wells Fargo and Fidelty. I never kept a balance and always made multiple payments throughout the month so that it would hardly report a balance. I tinkered around with keeping a balance and then having all paid off. Depending how much you have does make a difference but I believe it is more so if you keep 0 - 30% you get a certain ding, 31% - 60% it's another ding then you have the max out range.

Also, what I notice is that what is being calculated is how you pay your bills across the board. Let's say you always keep a 0 balance and then you may make a major purchase that run your CL all the way up, but you pay it down fairly quickly will be calculated differently then when you just keep a 90% utilization and only pay the minimun for a long time. Two different scenarios.

If you are one of those people that pay it off quickly the bank may raise your CL, if you are struggling to make minimums and keep high balances your CL may gets cut because the bank may feel as you are struggling and therefore become a risk.

Ultimately, Banks make money of each and every swipe that you make, so they do want you to swipe a whole lot but they don't want you to become a risk because if you swipe a lot and can't pay it back that means they will lose money. So that is why the frown on carrying high balances. There is a difference if you blow out your utilization every once in a while but then pay it back quickly vs. someone that just floats barely touching the max out.

That is how banks assess how much credit to give you, if they see that you have a $1000 credit limit and you charge $800 but pay it off let's say before the due date, the bank may give more credit. It is even better to make mulitple payments throughout the month. If you have a $1000 credit limit, charge $500 then pay it down to 0 and be certain to pay it 0 before the statement close date because that is the balance that is reported to the CRA. Using this method does several things, it shows the bank that you do not have enough credit hence that is why you keep paying on it to keep the balance low especially when you pay it to 0 before closing dates. 2) it helps you control your spending, if you say I always make a payment once  I reach $300 - $500, so you never max out.

Also lastly, a Credit Score is mainly important when you are trying to buy something, get a loan, or credit card. Outside of that if you have a credit card that give you a 0% APR for 15 months, then why not take advantage of it, it is called making your money work for yourself. If you have a $5000 CL and you want to buy something for $3000 - $4000 because your 0% APR but you know you can pay it all of in about 6 months then it should be a problem because ultimately your score will go back up once you pay it down

Banks want to deal with responsible credit users that's why they give you the credit, if you use as to where you don't really need it but it is more so convenience for example you pay your bills, you don't have to use cash and you can float it out for an additiona 30 days then do so. The key components are to never look desperate for credit!

Desperate = 1. Max'd out CC / making min. payment for a long period of time 2. Max'd out CC / make min payment but then use that payment to charge again. 3 You keep adding to your debt every month like first your balance is 500 next month 1000, then 1200....

As long as you have a long strong history of keeping your balances low and paid off, carrying a big balance for a short period of time won't be that deterimental unless you are looking for more credit.

These credit algo's factor in your ENTIRE History and going forth, so even if we do similar things we still differ and it will reflect in the FICO, So me keeping a high balance may not affect me as bad as it may affect you. Just as someone else's credit behavior affects their scoring  very different than from someone elses

Credit Karma Team
Top Contributor
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Thank you for your very thoughtful reply!

Reply by
BuildItUp14

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Well worth the read! Thanks for taking the time to post it. All valuable insight.

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Helpful to 15 out of 15 people

From reading many of the posts on these forums, I figured out how to get the system to work for me. I have 5 credit cards. I set up a single autopay on 3 of them--internet, car insurance, netflix. This ensures they won't go inactive. I then use another card solely for gas purchases. And my Amazon card for everyday purchases (reward points yay).

I figured out the closing date of each of these cards. Three of them close before the 15th.  So on the 15th, I pay off those three completely. Two of the cards close around the end of the month, but before the 30th. So on the 30th, I pay off those two completely.  This means a few positive things:

  • When the cards report to the credit bureaus on their closing dates, I'm showing around 3% utilization.
  • I then pay my cards off completely 2 or 3 days later. This means no interest charged because I'm paying all my cards off within 30 days.
  • I'm paying my bills almost a month early so I never have to worry about missing a payment.

This might seem like a pain to keep track of, but a simple spreadsheet makes it no problem at all. I keep a list of the cards with the date to pay them off. So on the 15th or 30th, I just see which to pay, do it, and then check them off to show it's been done.

My credit score is now 730 and I've maintained that for 3 months now, since I started doing this.

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Reply by
TeamCKJen

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Thanks for sharing your experience!

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To those of you who do not understand why you're getting a "C" rating on your credit report, I have the answer. The reason you're getting a C is due to the fact that you are charging on your card then turning around and paying it off to $0 before the end of that cards billing cycle. Your card reports to the credit bureaus after your billing cycle. Let's say I charge $70 on the 5th, I pay it off on the 12th. My billing cycle ends on the 18th. (Just an example) So when my card reports this, it shows $0. To the credit bureaus, that is 0% credit card utilization. 0% is a grade of C. 1%-20% is an "A" grade. You are trying to do the right thing by having activity on your card and also avoiding an intereste rate by paying it to $0, but, paying it too early. Call your card, ask what the date is for the end of your billing cycle. Charge before the billing cycle then pay it off after the billing cycle but before your due date. Remember 1%-20% utilization is an A but you have to give your credit card company time to report your usage. So.... Wait, pay it off after the end of the billing cycle and before the due date. Repeat this month after month. 

Reply by
cladydl

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Spanky1411,

Thanks for clarifying the utilization thing because I was kinda concerned about why I have an A credit rating, yet a C for utilization.  Cool!

However, the problem is that if the reporting agencies grade me for paying off my card early (i.e. within the billing cycle rather than at the end of it), then I'd have to succumb to paying interest in order to raise my score on utilization.  This suggests that the utilization score is premised on paying interest, which is advantageous to the bank, not the consumer, yes?  Of course, this is if your bank has an interest-free grace period after the billing cycle date.

  -Derrick

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Reply by
FirmAndSteady

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That's mostly good advice, however, to earn the "A" rating, most card companies like to see utililization rates between 1%-9%.  Jumping it past 9-10% will get you a "B".  For the best scoring, I recommend no more than 9.0%.  Many banks will show your useage as "too high" when it's between 10-30%, when many of the "experts" say that's good ulilization for best scoring.  Don't believe it!

1 Contribution
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Helpful to 13 out of 13 people

contact your CC company and ask them what your report date is......(the date at which they report to credit bureaus) this is usually a few days after your "Statement" date, not your "Due" date....use all of your card you want just make sure its below the 30% mark around the report date.  then pay the rest off by your due date and repeat.....my credit score have grown 120 pts in 8 months using this method never carry a balance and always showing 25-30% every month but never charged interest.....hope this helps someone took me months of researching to find this neat little trick

Reply by
gilbert1531

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your saying you had balance of 30% when they reported to the credit bureaus??

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I will be 30 this year and like a lot of people, I did some stupid stuff with my money when I was younger. Now that I want to build or buy a house, I finally realize what it means to have bad credit, and understand the phrase, "your credit score stays with you for the rest of your life".

In an effort to help improve my credit, I got a secured credit card through my credit union in February. Unfortunately, I had not done all my research and asked all of the important questions when I got it. I'd never had a credit card before, and I thought that you can use all of your limit ($500 for me) and then just make minimum payments to bring it back up. Imagine my surprise when I checked my credit score a month ago and found that it dropped 26 points and it showed that I have a maxed out credit card. Talk about feeling like an idiot! Lesson learned the hard way.

I now have my card locked in a safe so that I'm not tempted to use it while I pay it off. I hope to be able to start over and I will use it much differently now that I've had a little education!

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I use my CC every month, then pay it off when it's due.  My limit is $250 on a secured card.  I'll charge $25-60 then pay it off.  I've been doing this for a year.  My utilization says 0.  How do I change that?  That seems odd since I utilize it every month.  Any suggestions as to what's going on?

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Reply by
wjdNJ

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Are you paying by the due date or are you paying by the billing date?  On all my credit cards, the utilization always reflects the amount each card's bill says is due.  If, for example, I charge $100 over the month but I pay it off the day before the billing date, my utilization for that card would show $0.  If, on the other hand, I were to wait until the card bills, and then pay the $100, it would show my utilization as $100.

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Reply by
tln37

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Whatever your bill has after the due date is what they see as "utilization". So if you want to raise your score a bit, go buy something small such as a can soda from 7-11 and leave it after the due date. Do this every other month and every other month in between pay the full balance off. Guarantee it will raise your score.

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Reply by
tln37

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Enter Your ReplyWhatever your bill has after the due date is what they see as "utilization". So if you want to raise your score a bit, go buy something small such as a can soda from 7-11 and leave it after the due date. Do this every other month and every other month in between pay the full balance off. Guarantee it will raise your score.

Top Contributor

Reply by
tln37

29 Contributions
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Enter Your ReplyWhatever your bill has after the due date is what they see as "utilization". So if you want to raise your score a bit, go buy something small such as a can soda from 7-11 and leave it after the due date. Do this every other month and every other month in between pay the full balance off. Keep this up and it will raise your score.

1 Contribution
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My credit usage went from 1% to 3% this month and my credit went down.  That's F'd up.  Its only 1 point but it shouldnt go down at all with only 3% utilization.

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Reply by
wjdNJ

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Every dollar of credit utilization is $1 more that your lenders have at risk.  Of course, the lower your utilization is, the lower the impact of the increased risk is on your score.  Remember, the probablility of default is never 0%.  Your credit scores fluctuate on almost a daily basis.  Don't get so caught up in the small changes and focus on the big picture.  You'll be much happier.

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   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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We pay our Credit Cards off faithfully: From $7000 down to zero and then used again the following month. It should not be on the amount or % not used: it should be based on the history of paying the card off or making sure that there is a balance that is not negative to the lender.

The credit bureau's have dropped my credit down below 650 when I pay all bills faithfully and the cards are never maxed out and not paid. History shoudld play into the score and not just the amount of credit available.

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Helpful to 4 out of 4 people

Here is what works for me. I like many of you refuse to pay interest on any of my cards. At the same time I want to reap the rewards for low utilization and take advantage of my rewards cards. So this is what I do each month. I pay a majority of my bils with 3 credit cards which equals about 3k per month. (1k per card) Immediatly I pay half of the balances. (only had to do this once to get ahead of the billing cycle)  I currently get paid every 2 weeks and as a result I pay the second half when I get paid next. (only to keep me on track) Then the cycle continues but now I make the payments on payday only. If you do it this way you get ahead of the cc billing cycle and actually don't even need to know the cc due date. You will always show a balance when the cc company takes their monthly snap shot but will not pay interest.  This works with 3 cards all with different closing days though I pay them all on the same day.

Credit Karma Team
Top Contributor
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Sounds great! Congratulations on earning rewards while avoiding interest. 

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