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Maintaining a 0% utilization rate on all your credit card accounts can help your credit scores, but you can achieve excellent scores without doing so. A low utilization rate, preferably under 10%, is ideal.
You do risk hurting your credit scores if your utilization exceeds about 30%, but also if you never use your credit cards at all. Here's the rundown on utilization and credit scores.
Credit Utilization and Credit Scores
Before we dig into the details of credit utilization, here are some important things to understand:
- Utilization rate is the percentage of your credit limit represented by the outstanding balances on your credit cards and other revolving credit accounts. Credit scoring models such as the FICO® Score☉ and VantageScore® consider the utilization ratio for each individual credit card and your overall utilization, calculated by dividing the sum of all your outstanding card balances by the sum of all your credit limits.
- Credit utilization is a major component of a FICO® Score factor (amounts owed) that's responsible for about 30% of your score. A utilization rate that exceeds about 30% will tend to lower your credit scores.
- Paying off your credit card balances in full every month prevents interest charges on most credit card accounts and is also a great way to build strong credit scores.
Is a 0% Credit Utilization Good?
Now things get a little trickier. Paying your balances in full each month isn't the same as maintaining 0% utilization. Here's why.
Credit scoring systems calculate utilization using balance information that card issuers report monthly to the national credit bureaus (Experian, TransUnion and Equifax). Each issuer reports balance information on its own schedule, and many report to different bureaus on different days of the month. Each credit bureau also has its own timetable for revising your credit report once it has received a card issuer's update.
For these reasons, if you use your credit cards at all, your utilization can vary from day to day at any one credit bureau—and it will differ from one credit bureau to another, even though all of their records are accurate.
Here's a simple example:
Let's say you use a credit card with a $5,000 credit limit and zero balance to make a $500 purchase on the 10th of the month. You then pay that balance in full on the 20th, before the charge even appears on your statement. If the card issuer reports your balance information to Experian on the 15th, then credit scores based on Experian data will reflect 10% utilization for that card on that month. Meanwhile, another credit bureau that gets updated on, say, the 25th will reflect 0% utilization for that card.
Factor in multiple cards and balances, and you can see that your utilization on any given day is something of a moving target, and so are credit scores based on it. (The normal differences between credit scores based on data at different credit bureaus is one reason many lenders use more than one credit score when processing loan or credit applications.)
Put another way, the only way to be sure you have 0% utilization all the time is to refrain from using your credit cards at all—a strategy that has the following potential pitfalls:
- A credit card issuer may close your account if it is inactive for an extended period. This lowers your available credit, which can cause your overall utilization to rise and credit scores to suffer.
- A pattern of timely debt payments over time promotes increases in credit scores, but when a card issuer closes your account due to inactivity, your credit reports won't reflect any additional payments.
- Eventually, if your account is closed and there is no activity at all on your credit reports for six consecutive months (180 days), the FICO credit scoring system will not generate a credit score for you. This won't occur if you have other debt payments, such as student loans or a mortgage, but if your only form of credit is credit card accounts, extended inactivity could make you temporarily "credit invisible," potentially complicating your ability to get new loans."
To avoid these issues, it's a good idea to use all of your credit cards at least a few times each year. If you use them for small purchases that you quickly pay off in full, you won't incur any interest charges, but you'll keep the card accounts active and add to the payment history on your credit reports.
What's the Best Credit Utilization Rate?
As mentioned above, experts generally advise keeping credit utilization rates below about 30% to avoid more significant reductions in credit scores. This is a general guideline, however, not an absolute limit. Depending on your payment history and how long you have been using credit, levels somewhat higher or lower than 30% could be where utilization begins to adversely affect your credit scores. Many individuals with FICO® Scores considered exceptional keep their utilization ratios under 10%.
How to Lower Your Credit Utilization Rate
If your credit utilization is higher than you'd like it to be, there are two approaches you can take to changing that:
Lower Your Outstanding Credit Balances
The most productive way to reduce utilization is to pay down your outstanding credit card balances. For fast reductions in utilization, identify cards with balances that constitute the highest percentages of their spending limits, and pay them down first. Aim to get all cards below 30% utilization.
Increase Your Amount of Available Credit
If you've had a credit card account for a year or longer and have kept up with all your payments, consider asking the card issuer to increase your available credit limit. They may say no, but it can't hurt to ask. If they do raise your limit, the utilization rate on any outstanding balance on that card will instantly decrease.
If you have a good reason to open a new credit card account, one effect of doing so will be increasing your overall borrowing limit, which can reduce your overall utilization rate (assuming you avoid racking up big charges on the new account). You can find a credit card matched to your credit profile with Experian CreditMatch™.
Note that opening a new account just to reduce utilization isn't a great idea: It's never wise to take on more credit than you need. Also, new credit applications can cause your credit scores to dip a few points, which might temporarily offset any gain you see from lowered utilization in the short term.
The Bottom Line
Keeping a low credit utilization rate is good for promoting credit score improvement, but if you use your cards at all, keeping utilization at 0% over extended periods is practically impossible. What's more, doing so has no real benefit to your credit standing, and could actually hinder your efforts to build your credit scores.