30% credit utilization rule

What is the 30% Credit Utilization Rule?

The 30% credit card utilization ratio is the percentage of your total available credit that you are currently using. It is calculated by dividing your total credit card balances by your total credit limits across all cards.

Financial experts often recommend keeping your utilization ratio below 30%. This means using no more than 30% of your total available credit at any given time. The 30% utilization rule exists because credit scoring models consider high utilization to be a sign of credit risk. The higher your ratio, the more it can negatively impact your credit scores.

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Specifically, FICO and VantageScore formulas take into account your credit utilization when determining your creditworthiness. High utilization can lower your credit score, while low utilization can raise it. This is because high utilization may indicate you are overextended and depend too heavily on credit cards to fund your lifestyle. Conversely, low utilization shows lenders you use credit responsibly and likely have additional borrowing capacity.

Generally, it’s best to keep your utilization below 30% across all cards for optimal credit scores. However, even lower ratios are better. Some experts suggest keeping it below 10%. The lower your utilization, the more favorably it reflects on your creditworthiness. But zero utilization is not ideal either, since lenders want to see you actively manage credit. The key is finding the right balance for your credit profile!

Why 30% is the ideal credit utilization ratio

The 30% credit utilization rule is based on historical data analyzed by FICO showing that consumers with revolving credit card balances around 30% of their available credit tend to have the highest credit scores. According to Nerdwallet, people with credit utilization ratios around 30% have an average credit score of 710, while people with either lower or higher utilization ratios have lower average scores.

There are a few potential reasons why you should follow the 30% rule:

  • Keeping utilization around 30% shows lenders you regularly use credit and also pay it off responsibly each month. Utilization that is too low or too high can signal you don’t use credit often or rely too heavily on it.
  • 30% balances require significant monthly payments, demonstrating you can reliably handle credit expenses. Extremely low balances produce very small minimum payments.
  • With 30% utilization, you still have substantial available credit remaining each month as a buffer against unexpected expenses or income disruptions. Higher utilization leaves less backup credit capacity.

In summary, the 30% rule emerged because moderate revolving credit utilization tends to correlate with responsible credit management and lower perceived lending risk. However, the 30% figure is just a general guideline, not a strict rule.

How Utilization is Calculated

Credit utilization is calculated by dividing your credit card balances by your total credit limits.

Utilization can be measured in the following way:

Individual card utilization- This looks at the balance divided by limit for each credit card separately. For example, you may have one card with a $5,000 limit and a $2,000 balance (40% utilization) and another with a $10,000 limit and $3,000 balance (30% utilization).

When it comes to the balances used in the calculation, you can use either the total current balance or just the statement balance.

The statement balance is what gets reported to the credit bureaus and impacts your credit score.

The total current balance gives you an idea of where you stand utilization-wise at any given time.

Long-Term Impacts on Credit Score

According to Experian, high credit card utilization can negatively impact your credit score for as long as your balances remain high. This means that utilization patterns over time matter, not just a one-time spike in utilization.

If you have high utilization one month but pay it down the next, your score will likely rebound quite quickly. However, if you maintain high balances over several months or years, it gives the impression that you are overextended and regularly rely on credit cards to get by. This can cause more lasting damage to your score.

Brief spikes in utilization (e.g. for a large purchase) are generally not a major issue if you have otherwise demonstrated responsible usage. But consistent maxing out of cards or staying above 30% utilization will cause your score to steadily decline. The longer you maintain high balances, the more it drags down your score.

Getting back to lower utilization helps your score recover over time. But the longer you had high utilization prior, the more gradual the rebound is likely to be. This highlights the importance of proactively managing utilization before it becomes an ongoing problem.

When Utilization is Reported

Credit card companies generally report your statement balance to the credit bureaus once per month, around your statement closing date. This is the balance that gets reported to calculate your credit utilization.

Credit bureaus receive the updates on your statement closing date, which is usually about 3 weeks before your payment due date. For example, if your statement period closes on the 15th of each month, that’s typically when the balance gets reported.

The timing of when your balance is reported can impact your utilization. If you pay your balance early before the closing date, the lower balance will be reported rather than the full monthly spending amount. However, you don’t need to micromanage utilization on a month-to-month basis. The long-term trend of your utilization is more important.

Managing Utilization Month-to-Month

Paying off your credit card bill before your statement closing date is an effective way to keep your utilization low. Credit card issuers only report your statement balance to the credit bureaus once a month. By paying down your balance before the statement ends, you can lower the balance that gets reported. For example, if your statement period closes on the 15th of each month, you could make a payment on the 14th to lower your reported utilization. This strategy allows you to use your credit card normally during the month but reduce your balance right before it’s reported.

Requesting a higher credit limit is another way to lower your utilization. Your utilization ratio depends on how much of your total credit limit you are using. If you request and receive a credit limit increase, your utilization percentage will decrease even if your balance stays the same. However, a credit limit increase is not guaranteed and too many requests may negatively impact your credit.

Additionally, keeping old credit card accounts open will help you to have a higher credit limit.

Utilization vs. Credit Limits

Credit utilization compares your total credit card balances to your total credit limits across all cards. If you have a low overall credit limit, it can be challenging to keep utilization low. For example, if your only credit card has a $1,000 limit and you carry a $500 balance, your utilization would be 50% – well above the recommended 30% threshold.

Those with lower credit limits have fewer options to manage utilization. Possible strategies include:

  • Ask issuers to increase your credit limits. This immediately boosts total available credit and lowers utilization. However, a credit inquiry may temporarily lower your score.
  • Open a new card. Adding available credit from a new account can reduce overall utilization. But again, new accounts can also temporarily impact your score.
  • Make multiple payments per month. Paying down balances more frequently keeps reported balances lower.
  • Request a different statement date. This staggers when your balances are reported to the bureaus.

The most sustainable approach is continuing to use credit responsibly over time. As your profile ages, issuers are more likely to raise limits without you asking. Building credit helps ensure you aren’t stuck with low limits that make managing utilization difficult.

Utilization for Credit Building

When trying to build or rebuild your credit, utilization can be an important factor. However, it’s also important not to become obsessed with maintaining a perfect utilization rate if it prevents you from using your credit responsibly.

Here are some tips for building credit with utilization:

  • Make at least the minimum payment every month if you can’t make the full payment. On-time payments are critical, so don’t miss payments chasing low utilization.
  • Use your credit card lightly at first. When rebuilding credit, lenders want to see responsible use. Charging 30% right away could seem risky. Start with 1% – 10% and build up to higher utilization.
  • Consider a secured card. Secured cards require a deposit and tend to have low limits, making it easier to maintain low utilization. This helps build credit.
  • Ask for card limit increases over time. As your score improves, request higher limits so the same balances will represent lower utilization.

The key is using credit regularly and making on-time payments. Utilization will fluctuate month-to-month. Focus on responsible habits, and your score will improve.

Special Cases To Note

Authorized user accounts can impact your credit score in unique ways. Being added as an authorized user on someone else’s credit card account can help build your credit history, especially if you don’t have much credit history yourself. However, the primary account holder’s behavior also impacts your score. If they miss payments or max out their credit card, your score may suffer as well.

Store credit cards like those from department stores can also impact your credit differently. These retailer cards tend to have lower credit limits but make it easy to max out your utilization. Using a high percentage of your limit on a store card can negatively impact your credit score. It’s best to keep your balance low on these cards as well.

Key Takeaways

The 30% credit card utilization rule recommends keeping your credit card balances below 30% of your total credit limit. This helps optimize your credit scores, as credit utilization makes up a significant portion of your score.

Here are some key takeaways:

  • Keeping utilization below 30% can benefit your credit score, while high utilization over 30% can hurt your score. The lower the utilization, the better for your score.
  • Utilization is calculated by dividing your total balances by your total credit limits on all cards. This percentage is updated every month when balances are reported.
  • Don’t worry about minor month-to-month fluctuations in utilization. Focus on the long-term average over time.
  • Pay down balances before the statement closing date if utilization will be over 30% that month.
  • Carrying a small balance does not help build credit; pay in full each month to avoid credit card debt and interest charges.
  • Those with thin credit files may benefit from reporting some utilization each month.

Following the 30% credit utilization rule and minimizing high balances can help build and maintain strong credit over time. Monitor your utilization periodically and adjust spending or pay down balances when needed.

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