As a credit card rewards enthusiast, you already know that keeping your credit score in great shape is important. Good credit is essential if you want to keep yourself in a position to qualify for the best credit card offers when they become available.
Keeping a close eye on your credit card utilization ratio is one strategy you can use to maintain a good credit score. Credit utilization — or the relationship between your credit card balances and limits — is an important factor in your score. In fact, 30% of your FICO Score is largely based (though not entirely) on your credit card balance-to-limit details.
In general, a lower percentage is better in this area. But there is some debate about what the perfect credit utilization ratio looks like.
Many financial experts recommend keeping your utilization rate below 30% if you want to earn optimal credit scores, but there may be more to the credit utilization story. Here’s what you need to know.
What is credit utilization?
Credit utilization describes the percentage of your credit card limits that are in use. Let’s say you have a single credit card with a $10,000 credit limit. If the balance on your account is $5,000, your utilization rate is 50%. In other words, you are using (or utilizing) 50% of your credit limit.
Credit scoring models, like FICO and VantageScore, look at credit utilization in two ways when calculating your credit score:
- Individual credit card utilization measures how much of your credit limit you’re using on each of your credit cards.
- Aggregate credit card utilization measures the overall credit limit percentage you’re using on all of your credit cards combined together.
With both measurements above, it’s not the real-time balance on your credit cards that matters. Rather, credit scoring models base your credit utilization rates on the balance and limit details that appear on your credit report. Card issuers usually update that information once a month — around the time they issue your monthly statement.
Related: How credit scores work
Is 30% credit utilization a magic number?
In short, no. In spite of a Google search about “credit utilization” or “revolving utilization” producing dozens of articles suggesting that you should keep your credit utilization ratio at or under 30% to optimize your credit scores, this isn’t necessarily the case.
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Indeed, lower credit utilization rates are generally better for your credit score, but staying under the 30% utilization threshold might not be enough to boost your score.
What FICO has to say about credit card utilization
Can Arkali, senior director of scores and predictive analytics with FICO, confirms that using a low percentage of your available credit can have a positive impact on your FICO Score. Yet Arkali adds, “there is nothing ‘optimal or significant’ about 30% credit card utilization.”
But generally speaking, FICO scoring models consider a 30% credit card utilization rate less risky than a 50% utilization percentage. As a result, you’d likely see a 30% utilization rate lead to a better score than what you’d see at a higher threshold. Still, 30% utilization would be viewed less favorably than a lower utilization rate.
What VantageScore has to say about credit card utilization
VantageScore, meanwhile, does recommend keeping your utilization level at or below 30%. But the company doesn’t go as far as stating that 30% is the perfect utilization percentage.
Jeff Richardson, senior vice president of marketing and communications for VantageScore Solutions, says the impact of any single credit score factor, like utilization, depends on the overall make-up of that person’s credit profile.
“A person with many delinquencies might not be impacted by going over 30% [credit utilization] as much as someone with a pristine credit record,” according to Richardson. “That said, models differ, and in general, it is best to keep your utilization rate below 30% and to maintain that positive behavior over time.”
VantageScore’s website also notes that consumers with the highest credit scores typically have single-digit utilization rates.
Related: Your next credit card approval is in the hands of these 3 agencies
Is 0% credit utilization best?
While a low utilization rate is good, having a 0% ratio would mean not using your credit cards at all, which isn’t a great approach either. Arkkali says, “In some cases, a low credit card utilization will have a more positive impact on your FICO Score than not using any of your available credit at all. Having a low utilization indicates you are actively using credit in a responsible manner.”
If you don’t use a credit card on a regular basis, you could encounter other problems too. For example, your card issuer might lower your credit limit, and in some cases, your credit card company might opt to close your account altogether due to inactivity.
Related: Why never using your card may cause you to lose it
What is the perfect credit utilization ratio?
Unfortunately, there’s no perfect credit utilization ratio. A 1% credit utilization might be the best percentage to aim for since it’s a cross between showing activity on your account and keeping your utilization rate as low as possible. However, maintaining 1% utilization on your credit report likely isn’t a realistic goal.
Remember, it isn’t the real-time balance on your account that matters where credit scoring is concerned. It’s the balance and the limit that shows up on your credit report.
Yes, you could have a 1% utilization rate on your credit card when your billing cycle ends. By doing so, you might even end up with 1% utilization on your credit report for the upcoming month. However, the timing is sensitive, and this strategy has a lot of room for error.
Arkali says, “There are no hard and fast rules for an ideal credit card utilization.” But he does mention that recent FICO research shows that consumers with the highest credit scores (the top 25% with FICO Scores above 795) use an average of 7% of their credit card limits.
Related: How to check your credit score for free
How to decrease your credit utilization
When it comes to credit cards, it’s best to pay your full statement balance every month. This good habit can save you money on interest fees and protect your credit at the same time. In fact, paying your balance in full is TPG’s number one credit card commandment.
If you want to keep your credit utilization rate low to maximize your credit scores, there are a few strategies you can try. First, consider paying your credit card bill multiple times per month. This habit also helps you maintain a lower account balance and utilization rate.
You can also call your credit card issuers (or log in to your account online) to determine the statement closing date on each of your cards. If you pay your balance down before this date (and leave it there until afterward), you should end up with low utilization on the account the next time your card issuer sends an update to the credit bureaus.
But be sure to pay attention to your credit card bill when it arrives. You may still need to make another payment by the due date on your account to avoid interest charges.
Finally, you may want to consider asking for an increase to your existing credit limits. As long as you don’t spend additional money on the card, higher limits can lower your utilization since your outstanding balance is spread out over a larger line of credit. However, be sure to verify that requesting an increase won’t lead to a hard inquiry on your credit report.
Related: Biggest factors that impact your credit score
Bottom line
While you’ve likely heard the advice to keep your credit utilization at or below 30%, there’s no rule to that specific number. Use your credit cards, but aim to keep your credit utilization low to have the best chance at boosting your credit score.
Also, remember that your credit utilization is just one factor in your overall credit score calculation. To have a high score, consistently practice good credit habits like paying off your credit card balances in full and on time each month and keeping your credit utilization rate low.
Related: 6 things to do to improve your credit score
Additional reporting by Emily Thompson.
