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30% Credit Utilization Rule: Truth or Myth?

Using less than 30% of your available credit is a guideline rather than a black-and-white rule. One certainty: The lower your credit utilization, the better.
June 28, 2016
Credit Score, Personal Finance
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Credit experts trumpet the axiom that you should keep your credit utilization ratio — your credit card balances relative to your available credit — below 30% to maintain a good or excellent credit score.

The truth is, the 30% figure isn’t a binding threshold that will make or break your credit score. But it may still work as a guideline for most consumers. Let’s take a look at the facts, then discuss ways to calculate your credit utilization and keep it low.

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Myth or guideline?

How much you owe makes up 30% of your credit score, and your credit utilization ratio heavily influences that factor. But while most experts will tell you to keep your ratio below 30%, “there are no hard-and-fast rules for ideal credit utilization,” says Can Arkali, senior scientist for analytics and scores development at Fair Isaac Corp., whose FICO scoring model is a standard measure of consumer credit risk.

So why the 30% rule? It’s likely because the recommendation to keep your credit utilization low invariably prompts the question, “How low?” The 30% answer finds some backing from the credit bureau Experian.

Experian uses the VantageScore model, which is similar to the scoring model FICO uses. Consumers with good credit (or “prime” credit, using the VantageScore model) have a 30% credit utilization ratio on average. This seems to support the idea that maintaining a ratio of 30% isn’t a bad thing, and it could even be regarded as an upper limit to maintain good credit.

Consumers with FICO scores of 800 use, on average, 7% of their available credit.

Can Arkali, Senior scientist at Fair Isaac Corp.

Experian data also show that consumers with the best credit scores utilize only 8% of their available credit, proving that the lower your ratio, the better. The FICO scoring model seems to agree with this conclusion. “Consumers with FICO scores of 800 use, on average, 7% of their available credit,” Arkali says.

How to find out your credit utilization ratio

You can discover your credit utilization ratio in a couple of ways. You could use a personal finance website, such as NerdWallet, that offers a free credit score and presents credit utilization information as part of that. Or you can use this calculator to figure per-card and overall utilization:

Note that your credit score is composed of a number of factors. If your overall credit profile is in excellent condition, it’s unlikely that your credit score will plunge if your credit utilization ratio rises to 31% one month. But if you occasionally miss payments, have too many inquiries on your credit report or are new to credit, then utilizing more than 30% of your available credit will likely have a more harmful effect on your score.

How to keep your credit utilization ratio low

It’s best to keep your credit utilization ratio as low as possible. Here are a few tips to help you do that:

  • Pay off your balance in full every month. Carrying a balance month to month is not only expensive because you’re paying interest, but it also gives you less room for new purchases if you want to keep your credit utilization low. Paying off your balance in full makes it easier to keep your ongoing balance lower.
  • Ask your issuer when it reports to the credit bureaus. If your payment date is on the 5th of the month and your card issuer reports your activity on the 1st, you may have a high credit utilization ratio even if you pay in full every month. You can usually find out when your issuer reports to the credit bureaus by calling the issuer’s customer service line. Once you know, plan to make your payment in advance of the reporting date.
  • Request a credit line increase. Your card balance is only one variable in your credit utilization ratio; the other is your available credit. If your card has a low credit limit and you’re not concerned about going into debt, consider asking the issuer to increase it. Keep in mind that this might result in a hard inquiry on your credit report, which can knock a few points off your credit score. As long as you continue to have good credit behaviors, though, it shouldn’t have a long-term negative effect.

The bottom line

Although there are no absolutes when it comes to your credit utilization ratio, the 30% rule is helpful because it gives consumers a reasonable goal. However, data show that the lower your ratio is, the higher your credit score will be. “As long as consumers keep their revolving debt low, consistently make payments on all of their obligations on time, and judiciously apply for new credit,” Arkali says, “they can have very good FICO scores.”

This article was updated June 28, 2016.

Ben Luthi is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @benluthi.