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What is credit utilization?
Credit utilization is a measure of how much of your available credit you’re using from your revolving credit accounts.
You have an aggregate credit utilization rate for all of your accounts, as well as a separate credit utilization rate for each individual account.
Your credit utilization is a major factor that influences your credit score. It’s the biggest component in the “amounts owed” category, which makes up 30% of your FICO score and 20% of your VantageScore credit score. (Installment loans also contribute to this category, but they’re not generally considered part of your credit utilization rate.)
What is a good credit card utilization rate?
In general, a good credit utilization rate is one that’s in the single digits. FICO notes that consumers with the best FICO scores have an average utilization rate of 6%. 1
Having a lower rate boosts your score because it shows that you can manage your credit well and resist the urge to use money just because it’s there.
Many credit experts believe that some credit scoring models feature credit utilization “thresholds” (e.g., 10%, 30%, and 50%), and that if your utilization rate reaches these thresholds, your credit score will drop.
However, FICO and VantageScore have not confirmed this, and some of their published material seems to dispute the existence of these thresholds. According to Ethan Dornhelm, vice president of scores and predictive analytics at FICO, “There is nothing significant about 30 percent revolving utilization. It’s relative.” 2
Ultimately, whether these thresholds exist doesn’t make a significant practical difference. To maximize your score, try to keep your credit utilization rate low—in the single digits, if possible.
Is it good to have a 0% credit utilization rate?
There’s conflicting information out there about whether it’s good to have a 0% credit utilization rate on all of your accounts. Many people believe that it’s better to have a 1% utilization rate, and some third-party analyses of FICO’s models suggest that there may actually be a penalty for having no revolving credit accounts with an active balance.
This has led to the creation of the “All Zero Except One” (AZEO) method, wherein you try to maximize your credit score by paying all of your accounts down to zero except for one, which you keep a small balance on.
Some of FICO’s statements seem to back this up. John Ulzheimer, who formerly worked for Equifax and FICO, has said that a 1% rate predicts less risk than 0%, and that scoring models “reflect that.” Ethan Dormhelm of FICO has said, “In some cases, a low credit card utilization ratio will have a more positive impact on your FICO Scores than not using any of your available credit at all.” 3
However, Jeff Richardson, vice president and group head for marketing and communications for VantageScore, seemingly contradicted these statements, saying “The credit score rewards an open and active account in good standing with a zero balance.” 2
The takeaway is that it’s possible that a 1% utilization rate is better than a 0% rate, but this hasn’t been definitively confirmed by FICO or VantageScore. (It’s also possible that FICO and VantageScore’s models differ in this respect.)
In the end, whether the ideal credit utilization rate is in the single digits or is simply 0%, both are excellent rates that will benefit your credit score.
How does credit utilization work?
Your credit score takes into account your total utilization rate across all of your revolving credit accounts, but it also considers each individual account. 4 For this reason, it’s important to avoid a high credit utilization rate on any given credit card, even if your overall ratio is low.
For example, imagine that your total credit limit for your two credit cards is $20,000, and you’re using $5,000 of that. That gives you a total credit utilization rate of 25%, which isn’t bad. But let’s say that both cards have individual credit limits of $10,000, and you owe $5,000 on the first and no money at all on the second. This means the first card has a utilization rate of 50% and the second card has a utilization rate of 0%.
That high utilization rate on the first credit card is going to hurt your credit, even though your overall credit utilization rate is relatively low.
You might be able to improve your score by spreading your debts between both of your cards, although as VantageScore notes, this can also incur penalties if it leads to having too many accounts with an active balance. The best strategy is to limit your credit usage so that none of your accounts approach a high utilization rate in the first place. 2
How does credit utilization affect your credit score?
As mentioned, your credit utilization rate makes up 20% of your VantageScore. It’s also the main contributor to the “amounts owed” category in FICO’s model, which accounts for 30% of your overall FICO score.
Creditors use your score as a measure of how trustworthy you are as a borrower, so a bad credit score caused by a high utilization ratio can seriously limit your access to credit. If you have a bad credit score, any loans you qualify for will have high interest rates and may require additional fees.
How to calculate your credit utilization
To calculate your overall balance-to-limit ratio, follow these steps:
- Add up the credit balance on each of your revolving accounts to get your total credit balance
- Add up the credit limits for each of your revolving accounts to get your total credit limit
- Divide your total credit balance by your total credit limit
- Multiply the result by 100 to make it a percentage
You can also use a similar calculation (without adding any other cards) to figure out the credit utilization rate for each of your accounts.
How to lower your credit utilization
There are five ways you can reduce your credit card utilization rate in both the short and long term:
1. Lower your spending
The easiest way to bring down your credit utilization rate is to reduce your spending. Setting a budget can help you identify areas you can cut back on. You can also avoid overusing your credit card by using a debit card or paying in cash for day-to-day expenses.
2. Pay your debt early
Try to pay your bills before your creditor reports your balance to the credit bureaus. It’s not always possible to know when they’ll do this, but creditors often make their report every month on the statement date (the day they charge you for the previous billing cycle). 5
You may be able to find out the exact date by contacting your creditor, but it’s possible that they’ll keep the details of their credit-reporting process confidential.
3. Request a higher credit limit
If your expenses make it difficult for you to keep your utilization rate under 10% or 30%, you can try calling or emailing your card issuer and asking them to raise your credit limit. Requesting a credit increase will help your credit by reducing your utilization rate without requiring you to change your spending habits.
To get approved for a higher credit limit, you’ll probably need a reasonably good credit score and a credit history that shows you’re a responsible borrower who pays their bills on time.
4. Open new accounts
Opening a new account can lower your utilization rate by increasing your available credit and, by extension, your total credit limit.
Note that in the short term, opening a new credit card will lower your credit score by adding a hard inquiry to your credit report and lowering the average age of your accounts. However, your score will eventually recover, and afterwards, the new account will benefit your credit utilization.
5. Keep old or unused accounts open
You might think that you should close your old accounts when you stop using them, but doing so will reduce your total available credit. This drop will raise your utilization rate and hurt your credit score.
Instead of closing your old accounts, use them occasionally (every few months) so that your creditors keep them open.