Credit card utilization, the ratio of what you owe on your credit cards to your credit limit, plays major role in the calculation of your credit rating. According to FICO(R), the creators and maintainers of the FICO credit score model, it’s 30% of your score. Do a brief Internet search and you will find most experts touting the rule that keeping your credit utilization under 30% will maximize your score. Well, that’s not exactly true.
Being punished for high credit utilization may seem counter-intuitive: why would lenders give you a certain credit limit and then punish you when you try to use it? But that’s exactly what happens. In hard numbers, credit utilization makes up 30% of your credit score. As a comparison: your payment history makes up 35% of your score, the average age of accounts is 15%, the mix of credit is 10% and the amount of new credit that you have is 10%.
So why does credit utilization make up so much of your credit score calculation? Higher rates indicate danger:
According to Barry Paperno, who served as consumer affairs manager for FICO, there is no magic number like 30% where your credit takes a nosedive when you go above it or soars when you go below it. “With credit scoring it’s important to understand that mathematical calculations, based on data reflecting the experiences of millions of consumers and designed to predict future credit risk, don’t necessarily result in easy to remember numbers, like 30 or 50 percent, that can be assigned universally,” said Parperno on a creditcards.com blog post.
Both FICO and VantageScores look at credit utilization percentage ranges; these ranges are based on the 4 other factors in your credit score. However, in general, the lower the percentage range, the more points assigned to your score. If your credit utilization percentage moves to a different range (which may or may not be 30%), your score will adjust accordingly.
In addition, individual card utilizations may assign different points than your overall (the total of all of your credit cards) credit utilization rate. Therefore, even if your overall credit utilization rate is 10%, but one of your cards hits 60%, you may see a drop in points.
In 2014, Credit Karma sampled 15 million members who visited the site and compared credit scores and credit utilization rates. The highest score average, 753, was enjoyed by members whose total credit utilization rate ranged between 1 and 10%.
Interestingly, those with 0% utilization enjoyed a much lower average score of 692. The reasoning: a 0% credit utilization rate indicates that a person does not use credit regularly, which research has shown to indicate higher future risk. Yep, being in debt is actually good for your credit score.
Can’t keep your rate so low? The 30% utilization touted by blog posts everywhere is not a bad goal, and will keep your score relatively high.
How to Lower Your Credit Utilization Rate
If you have high utilization rates, or you are maxed out on your credit cards, getting your credit card balances under control is a matter of self-discipline leading to a modification of old habits:
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