Published in: Credit Cards | Nov. 27, 2019

Keep Your Credit Utilization Below This Number If You Want Good Credit

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It's not exactly 30%.

Between multiple credit scoring models and the many credit score myths floating around, it's not easy to figure out exactly how to achieve and maintain good credit. One of the most confusing (and important) factors that make up your credit score is your credit utilization -- in other words, how much of your available credit you actually use.

Most resources recommend keeping this ratio below 30%. But the Consumer Financial Protection Bureau's (CFPB) latest Consumer Credit Card Market report has some hard data that might suggest otherwise.

A woman holding shopping bags and a credit card.

Image source: Getty Images

Credit utilization and why it matters

Figuring out your credit utilization rate is simple.

  • Add up your credit limits across all of your credit card accounts.
  • Add up your balances, or how much you owe, across all of your credit card accounts.
  • Divide your aggregate credit limit by your aggregate balance.

For example, let's say you have one credit card with a $7,000 limit and a $3,000 balance and another credit card with a $3,000 limit and a $2,000 balance. Your aggregated credit limit would be $10,000 and your aggregate balance would be $5,000. That would make your credit utilization 50%.

This number has a significant impact on your credit score. The "amounts owed" category makes up 30% of your FICO® Score, making it the second most important category. Your credit utilization rate is a determining factor in the "amounts owed" category.

Average credit utilization by credit score

Common wisdom recommends keeping your credit utilization rate below 30%. In other words, if you have a $10,000 credit limit, you should try to keep your balance below $3,000.

And although this is a helpful guideline, it's not a hard-and-fast rule. Credit utilization works on a sliding scale, so having a credit utilization rate of 28% versus 33% isn't going to make much of a difference. The guideline is also the result of some educated guesses, as the actual credit scoring models aren't available to the public.

Luckily, the CFPB's 2019 Consumer Credit Card Market report provides some hard data that sheds additional light on credit utilization. In it, the CFPB reports the median cardholder utilization by credit score tier.

Consumers with "prime" credit scores of 660 to 719, which is generally considered good credit, have a median credit utilization rate of more than 40% -- significantly higher than the oft-recommended 30%. 

Conversely, consumers with "superprime" credit scores of 720 or higher, generally considered excellent credit, have a median credit utilization rate below 10%. Those with "subprime" or "deep subprime" scores have median utilization rates that are higher than 80%, stretching towards 100%.

This data suggests that it would not be a disaster for your credit score if you went over the recommended 30% credit utilization rate by 10% or even a little more, but it might not get you into the ranks of the 800 club either. 

It's also true that these data points don't prove any causal link. In other words, people with excellent credit could have low utilization ratios because they tend to keep low balances and get approved for higher credit limits, rather than it being their low balances that help them achieve that excellent credit. 

Ultimately, while you can have good credit if your utilization has crept above 30%, it certainly doesn't hurt to keep it well below that number.

Tips for keeping your credit utilization down

Credit utilization is one of the easier credit score factors to influence because it's recalculated regularly. This means that as you make significant improvements to your credit utilization, you should see near-instant improvements in your credit score. Here are some of the best ways to get your credit utilization rate down.

1. Pay off your balances

This method is ideal because it also means you are paying off debt and avoiding interest charges. Paying off your balances is one of the best ways to get an immediate boost to your credit score.

2. Ask for a credit limit increase

If you find yourself bumping up against your credit limit regularly, you should ask your bank to increase your limit -- regardless of whether you pay off your balance in full each month. This will lower your credit utilization rate even if you maintain the same balance. However, it's worth noting that some banks do a hard credit check when they process a credit limit increase, which can temporarily ding your score. Ask your bank whether or not they'll do a hard pull to be sure.

3. Apply for another credit card

Many people mistakenly believe that having too many credit cards hurts your credit score. This probably comes from the fact that your score will take a hit if you apply for too many credit cards in a short period of time. However, opening one or two credit cards usually only lowers your score by a few points, and it will start to bounce back a few months later. As long as you don't use them to overspend and you pay off your balances each month, the long-term positive effects of having multiple credit cards will greatly outweigh any temporary hit to your credit.

4. Pay off your bill multiple times each month

Your credit card issuer reports your balance once per month, and it's not necessarily reported after you've made a recent payment. This means that even if you always pay off your cards in full, you won't necessarily have a low credit utilization rate. Paying off your balance periodically throughout the month will help keep your credit utilization rate low. You can also ask your credit card issuer when they report to the credit bureaus and adjust your payments accordingly.

5. Never close an old credit card

Unless you're paying an annual fee on a credit card you don't use, you should keep old credit cards open. Not only do they add to your overall credit limit, which keeps your credit utilization rate low, but they can also improve your length of credit history, which accounts for 15% of your FICO® Score.

Making the move from good to excellent credit can get you approved for the best rates on loans and mortgages and the most lucrative rewards credit cards. As long as you don't keep your balance at $0, the best credit utilization rate guideline is this: the lower, the better.

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