Published in: Credit Cards | Jan. 1, 2019

This 1 Trend Proves Americans Are Finally Using Credit Cards the Right Way

By:  Eric Volkman

We are committed to full transparency as part of our mission to make the world smarter, happier, & richer. You should know that offers on The Ascent may be from our partners - it's how we make money. That transparency to you is core to our editorial integrity, which isn’t influenced by compensation.

The development of this indicator is very, very encouraging.

Person holding credit card

Image source: Getty Images

It seems that there’s always an alarming statistic about consumer credit making its way through the media. Americans are borrowing more! Default rates are rising! Bankruptcies will soon go through the roof!

Dig a little deeper, though, and you’ll find signs that the development of consumer credit is appropriate for a still-growing economy. And better, Americans have smartened up about how to wield that credit. Here’s a recent trend that I believe supports this hypothesis.

Credit utilization remains steady

The trend that’s our friend here is credit utilization. According to credit rating agency Experian’s most recent annual State of Credit report, Americans’ overall credit utilization was flat from 2016 to 2017. That was in the face of an uptick in the average credit card balance figure, which rose by nearly 3% to $6,354 across that period.

What can we glean from these numbers? Basically, they reveal that while Americans are taking on more debt, they are not doing so irresponsibly. Experts say that the answer to the question “what is a good credit card utilization rate?” is 30%. Despite the increase in borrowings from 2016 to 2017, we’re maintaining that prudent level.

This is good for our national economic health. After all, with more credit available and utilization rates level, we consumers are building up more economy-boosting spending power.

Credit utilization affects credit score

Your personal (or your family’s) credit utilization ratio isn’t only important for your immediate financial health. It also has a sizable impact on your credit score, the all-important number that indicates your suitability for a debt instrument like a bank loan or credit card.

In fact, credit utilization is the second-most heavily weighted factor that determines your overall score. Zooming out a bit, let’s look at the elements that comprise the figure:

35%: Payment history -- Have you generally been good about getting your card payments in on time? Hopefully yes, as this is the single most important factor.

30%: Credit utilization rate

15%: Credit history -- The amount of time you’ve been a borrower, dating from the first account you opened. This shows how much experience you have managing debt.

10%: New credit accounts -- Your score is impacted by the number of debt instruments you’ve taken on in recent times; you may be dinged if that figure is relatively high.

10%: Credit mix -- Variety matters here. It’s not considered a good thing to have too much of one type of debt instrument.

How to improve your credit utilization

There are basically two ways to make that credit utilization rate better. If you’ve got a chance to combine them, by all means go for it.

The first, and arguably superior, is to pay down the outstanding debt as far as you can given your means. In addition to lowering the rate, this also has the positive effect of improving your overall financial health -- the less total debt, of course, the better.

Method No. 2 is to increase your credit limit. It is, after all, the denominator in the credit utilization ratio calculation. So by boosting this, your utilization rate will fall.

Requesting a credit limit increase is quick and painless with most issuers. Many have a link within their account management portals allowing you to apply for one online. Calling the toll-free number on the back of your card also works, for those nostalgic for voice phone communication.

At times, if your credit profile is sufficiently positive, an issuer might offer you a potential credit increase of their own volition. Those wishing to cut their utilization rate might well say a quick “yes” to such an offer.

Our #1 cash back pick has a surprise bonus

This may be the perfect cash back card! That's because it packs in $1,148 of value. Cardholders can earn up to 5% cash back, double rewards in the first year, and avoid interest well into 2020. With such a deep bench of perks you'll wonder how this card packs in a $0 annual fee. Best yet, you can apply and get a decision in two minutes. Learn more with our in-depth review.

Find the right card for you

0% APR & Low Interest