As a credit card rewards enthusiast, you already know that it’s important to keep your credit score in good shape. Good credit is essential if you want to hold yourself a position to qualify for best credit card deals when they become available.
Your close watch credit card usage rate is a strategy you can use to maintain a good credit score. Credit usage — or the relationship between your credit card balance and limit — is an important factor in your score. In fact, 30% of your FICO Score is largely (though not entirely) based on your credit card balance details.
In general, lower rates are better in this regard. But there is some debate about what a perfect credit utilization ratio looks like.
Many financial experts recommend keeping your utilization below 30% if you want to achieve an optimal credit score, but the story of credit utilization can be much more than that. Here’s what you need to know.
What is credit use?
Credit usage describes the percentage of your credit card limit being used. Suppose you have a single credit card with a credit limit of $10,000. If the balance on your account is $5,000, your utilization rate is 50%. In other words, you’re using (or taking advantage of) 50% of your credit limit.
Credit scoring models, such as FICO and VantageScoreConsider credit usage in two ways when calculating your credit score:
- Use a personal credit card Measure how much credit you’re using on each of your credit cards.
- Summary of credit card usage measures the percentage of your overall credit line you’re using on all your credit cards combined.
With both measurements above, the real-time balance on your credit card shouldn’t matter. Instead, credit scoring models are based on your credit utilization rate based on the balance and limit details that appear on your credit report. Card issuers typically update that information once a month — around the time they issue your monthly statement.
Related: How does credit score work?
Is 30% credit usage a magic number?
In short, no. Although a Google search for “use of credit” or “use of revolving” produces dozens of articles suggesting that you should keep your credit utilization ratio at 30% or less than 30% for optimal results. optimize your credit score, but this doesn’t have to be the case.
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Indeed, a lower credit utilization ratio is generally better for your credit score, but staying below the 30% utilization threshold may not be enough to boost your score.
What FICO says about using credit cards
Can Arkali, senior director of scores and predictive analytics at FICO, confirms that using a low available credit ratio can have a positive impact on your FICO Score. However, Arkali adds, “there is nothing ‘optimal or substantial’ about 30% credit card usage.”
But in general, FICO scoring models consider a 30% credit card usage rate less risky than a 50% utilization rate. As a result, you may see a 30% utilization rate leading to a higher score than what you see at a higher threshold. However, a 30% utilization rate would be viewed as less favorable than a lower utilization rate.
What VantageScore says about using credit cards
Meanwhile, VantageScore recommends keeping your usage at 30% or below 30%. But the company doesn’t go so far as to claim that 30% is the perfect utilization rate.
Jeff Richardson, senior vice president of marketing and communications at VantageScore Solutions, says the impact of any credit score factorlike usage, depends on the overall structure of the person’s credit profile.
“A person with a lot of past due debt may not be affected by going over 30% [credit utilization] as much as someone with a pristine credit record,” says Richardson. “That said, models vary, and in general, it’s best to keep your utilization below 30% and maintain that positive behavior over time.”
The VantageScore 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
Using 0% credit is best?
While a low utilization rate is good, a 0% rate means you don’t use a credit card at all, which is also not a good approach. “In some cases, low credit card usage will have a more positive impact on your FICO Score than not using any of your available credit,” says Arkkali. Having low usage indicates that you are actively using credit responsibly.”
If you don’t use your credit card often, you may encounter other problems also. For example, your card issuer may lower your credit limit, and in some cases, your credit card issuer may choose to close your account altogether due to inactivity. .
Related: Why never using your card could make you lose it
What is the perfect credit utilization ratio?
Unfortunately, there is no perfect credit utilization ratio. A 1% credit utilization rate may be the best percentage to aim for as it’s a cross between showing activity on your account and keeping your utilization as low as possible. body. However, maintaining 1% usage on your credit report may not be a realistic goal.
Remember, the real-time balance on your account doesn’t matter when it comes to credit score. That’s the balance and limit that shows up on your credit report.
Yes, you can have a 1% utilization rate on your credit card when your billing cycle ends. That way, you could even end up with 1% usage on your credit report for the next month. However, timing is very sensitive and this strategy has a lot of flaws.
“There are no hard and fast rules for the ideal credit card usage,” says Arkali. But he did mention that recent FICO research shows that consumers with the highest credit scores (the top 25% have a FICO Score above 795) use an average of 7% of their credit card limit.
Related: How to check your credit score for free
How to reduce your credit usage
When it comes to credit cards, it’s best to pay in full reported balance every month. This good habit can save you money on interest and protect your credit at the same time. In fact, paying your balance in full is TPG’s top priority credit card order.
If you want to keep your credit utilization ratio low to maximize credit score, you can try a few strategies. First, consider paying your credit card bill several times per month. This habit also helps you maintain a lower account balance and utilization rate.
You can also call your credit card company (or log in to your account online) to determine statement closing date on each of your cards. If you pay your balance before this date (and leave it there until a later date), you’ll have low usage on your account the next time your card issuer sends an update for credit bureaus.
But be sure to pay attention to your credit card bill when it arrives. You may still need to make another payment before the due date on your account to avoid being charged interest.
Finally, you might consider asking for a increase your current credit limit. As long as you don’t spend more money on the card, a higher limit can reduce your usage as your outstanding balance is spread out over a larger credit line. However, make sure to verify that the request increase will not result in difficult request on your credit report.
Related: The biggest factors affecting your credit score
bottom line
While you may have heard advice to keep your credit utilization at or below 30%, there is no rule for that specific number. Use your credit card, but aim to keep your credit usage low for the best chance of boosting your credit score.
Also, remember that your credit utilization is only one factor in your overall credit score calculation. To get a good 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 ratio low.
Related: 6 things to do to improve your credit score
Additional reporting by Emily Thompson.
