The ideal credit utilization ratio is under 10%, not 30% as commonly believed

Your credit utilization ratio is responsible for about 30% of your credit score. It is second only to payment history in importance. There are five main components of credit scoring.

If you are trying to improve your credit score, then paying attention to your credit utilization ratio is important. Even so, it helps to understand what an ideal credit utilization ratio actually is.

Most credit experts suggest keeping your credit utilization ratio at or below 30%. That means that $20,000 in credit limits would allow for up to $6,000 in balances before your credit score begins to suffer. However, this is not true!

According to Craig Watts, spokesman for Fair Isaac Corp., your credit score begins to suffer whenever your credit utilization ratio exceeds 10% on any revolving credit account. The damage is small, but the point is that your scores begin to drop when you utilize more than 10% of your available credit on charge accounts.

This is especially important for high volume chargers, since the total of your charges in a month count towards your credit utilization ratio, even if you pay off your balances each month. However, the effects of this are somewhat muted since credit scoring formulas also reward you for your use of credit.

If this sounds confusing, that’s because credit scoring is complex. It favors those who use credit over those who responsibly pay cash. Consider how different scenarios can improve or reduce your credit scores.

Reduce Credit Scores

  • Exceed 10% overall credit utilization ratio. If the sum of your revolving debt balances exceeds 10% of your overall credit limits, then your scores will begin to drop. The higher the ratio, the more your scores plummet.
  • Exceed 10% credit utilization ratio on individual account. Even if your overall utilization ratio is low, an elevated ratio on one account can still reduce your credit scores.
  • Leave accounts inactive. Credit scoring formulas reward you for responsible use of credit. If you don’t use it, you can be penalized.
  • Carry balances on many accounts. Credit scoring formulas penalize you if you carry balances on several card accounts. The more accounts with active balances, the more opportunities you have to forget to make a minimum payment.

Increase Credit Scores

  • Utilize credit accounts periodically. Regular use of credit is rewarded as long as you don’t use too much.

Unclear Impact

Some credit experts suggest maintaining a balance gives your credit scores a boost. Others say paying your balance off each month gives you the biggest boost. Unfortunately, this is one of the hidden complexities of credit scoring that Fair Isaac does not share. The major credit bureaus are also equally tight-lipped on this subject.

We can infer that carrying small balances actually provides a greater boost to your credit scores since it indicates that you provide revenues to your creditors through finance charges. Otherwise, if you pay your balances every month, then they only earn revenues from transaction fees.

There does appear to be some positive effect on credit scores for accounts that provide positive profits to the lender. This effect appears to be minor.

Our official position is that it is foolish to maintain a balance when you can pay it off. Who cares if your credit score increases from 788 to 791 just because you maintain small balances? Is it worth the $200 a year you pay in interest? You are better off to eliminate your balances and limit your use of credit to what you can easily manage. After all, Fair Isaac does reveal that simply having a zero balance on a card does not hurt you as long as there is recent activity on the account.

Your credit utilization ratio is one of the five main components of credit scoring. There are smaller individual factors that make up this component.

Kenneth Long
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Kenneth Long

President at Debtors Unite
Kenneth Long is President of Debtors Unite, Inc. as well as President and Vice Chairman for Vision Credit Education, Inc. He served as a regional coordinator for the North Carolina Saves campaign. Long co-founded the Wake EITC Coalition along with Family Resource Center of Raleigh.

Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.

Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.

In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.

Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!

Favorite quote:

"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."

Thomas Jefferson
Kenneth Long
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