Your credit scores can be improved by keeping all of your credit card accounts at 0% usage, but you can still earn good scores without doing so. The optimal utilization rate is modest, preferably < 10%.
If your credit card usage rises above 30%, as well as if you never use your cards at all, you do run the risk of damaging your credit ratings. Here is a summary of credit scores and utilization.
Utilization of Credit and Credit Scores
Before we delve into the specifics of credit consumption, it’s critical to comprehend the following:
The utilization rate is the portion of your credit line that is taken up by credit card and other revolving credit account balances that are still unpaid. The utilization ratios for each individual credit card as well as your overall utilization, which is determined by dividing the total of all your outstanding card balances by the total of all your credit limits, are taken into account by credit scoring models.
The amount of credit you are using is a significant part of the element (amounts owed), which accounts for around 30% of your score. Utilization rates above 30% have a tendency to reduce credit scores.
On the majority of credit card accounts, paying off the entire debt each month avoids interest costs, and it’s also a terrific method to raise your credit score.
Does 0% Credit Utilization Make Sense?
Things now become a little more challenging. Maintaining 0% usage is not the same as paying off your debt in full each month. This is why.
Utilization is determined by credit scoring systems using balance data that card issuers submit to the major credit bureaus on a monthly basis. Every issuer has a separate reporting schedule, and many issuers submit their reports on various days throughout the month to several bureaus. When a credit agency receives an update from a card issuer, it will update your credit report according to its own schedule.
For these reasons, even though all of the credit bureaus’ records are accurate, if you use your credit cards at all, your utilization will change from day to day and from one credit bureau to the next.
Here’s an easy illustration:
Let’s imagine you spend $500 on a purchase on the tenth of the month using a credit card with a $5,000 credit limit and no balance. On the 20th, before the charge ever appears on your bill, you pay off that balance in full. Credit scores based on its data will show 10% usage for that card that month if the card issuer provides your balance information to the bureau on the 15th. While this is happening, 0% usage for that card will be shown on another credit bureau, which is updated, say, on the 25th.
When you take into account various cards and balances, you can see that your utilization on any given day—and the credit scores based on it—are somewhat of a moving target. (One reason many lenders employ more than one credit score when processing loan or credit applications is the typical disparities in credit scores based on data at multiple credit agencies.)
In other words, the only method to guarantee you always have 0% utilization is to avoid using your credit cards at all. However, this approach carries the following risks:
If your account has been dormant for a long time, the credit card company could close it. This reduces your credit availability, which may result in a spike in your overall credit use and a decline in credit scores.
When a card issuer closes your account due to inactivity, your credit reports won’t show any extra payments, which is counterproductive to the promotion of gains in credit scores that a pattern of punctual debt payments over time fosters.
Eventually, the FICO credit scoring system won’t produce a credit score for you if your account is canceled and there has been zero activity on your credit reports for six consecutive months (180 days). If you have other debt obligations, such as college loans or a mortgage, this won’t happen. However, if your only source of credit is a credit card, prolonged inactivity could briefly render you “credit invisible,” which could make it more difficult for you to obtain new loans.
Use all of your credit cards at least a few times year to prevent these problems. You won’t pay interest if you use them for little purchases that you promptly pay off in full, but you’ll keep the card accounts open and build up your payment history on your credit reports.
Which Credit Utilization Rate Is Best?
As previously indicated, experts typically advise keeping credit utilization rates below 30% in order to prevent more drastic drops in credit ratings. This is merely a general recommendation; it is not a cap. Credit use may start to negatively impact your credit scores at levels somewhat higher or lower than 30%, depending on your payment history and how long you’ve been using credit. Many people with outstanding FICO® Scores keep their utilization ratios under 10%.
How to Reduce Your Credit Use Rate
There are two ways to change your credit utilization if it is greater than you would like it to be:
Reduce your credit card balances due
Paying off your credit card debt is the most effective approach to increase utilization. Find the cards with balances that make up the largest percentage of their spending limitations, and pay those off first, to reduce utilization quickly. Get all cards’ utilization down to under 30%.
Increase the credit you have available
Consider requesting the credit card company to raise your available credit limit if you have had a credit card account for a year or more and have made all of your payments on time. Even if they might answer no, it won’t harm to inquire. The utilization rate on any balance left on that card will immediately fall if they do increase your limit.
If you have a valid cause for opening a new credit card account, one result of doing so will be an increase in your total borrowing limit, which can lower your overall utilization rate (provided you don’t charge a lot on the new account).
Noting that it’s never a good idea to take on more credit than you need, opening a new account merely to lower utilization isn’t a fantastic idea. Additionally, if you apply for new credit, your credit score may drop a few points, which might short-term outweigh any benefit from lower use.
The conclusion
Maintaining a low credit use rate is beneficial for raising your credit score, but if you use your cards at all, maintaining a 0% utilization rate for an extended period of time is nearly impossible. Additionally, doing so doesn’t really improve your credit situation and might even make it more difficult for you to increase your credit scores.
