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The 30% Credit Utilization Rule

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Len Penzo
The 30% Credit Utilization Rule

Alongside credit history, the credit utilization ratio is one of the most important factors that affects your credit score. Experts claim that keeping it below 30% is the ideal way to maintain a good score.

The reality, however, is that there is no truly ideal utilization ratio. A ratio below 30% is a guideline, and anything below that should bode well for your score.

What Is Credit Utilization?

A credit utilization rate  is the amount of revolving credit you are using divided by the overall credit amount available to you. Simply put, it is the amount you owe divided by the limit you have. We can calculate it in the following manner. 

  • Make a sum of the balances on all your cards. Do the same for the limit on all of your cards. 
  • Divide the total balance by the limit of your cards.
  • Multiply the number by 100, which is your utilization ratio.

Let us assume that you have three cards with a current balance of $2,000, $4,000, and $500, and the spending limits on the three cards are $5,000, $10,000, and $2,000 respectively.  Calculate the utilization ratio as follows:

$6,500 (sum of total balance on all cards) / $17,000 (sum of the limit on all cards) = 38.24%

This number is important because scoring companies determine what amount of available money you are using. In the above example, the utilization ratio is 38.24%, which is slightly above the 30% level regarded as ideal by experts.

Both VantageScore and FICO consider credit utilization ratios when calculating scores. If you have a higher ratio, lenders consider you to be riskier and will likely charge you higher rates. When you use more of your available money, your scores will go down. It may make it difficult for you to qualify for loans with lower interest rates and better terms.

Is 30% Really That Important?

It is considered a general recommendation to keep your utilization ratio low, which leads to the question of: exactly how low much should it be? Experian, one of the three major bureaus, backs the 30% limit.

  • They make use of the VantageScore, and according to them, the 30% number is a maximum limit and not the target. Your scores are affected significantly when you cross that mark. 
  • The scoring model adopted by FICO (Fair, Isaac and Company) is also in agreement with this conclusion. According to them, consumers that have FICO scores of around 800, on average use only 7% of their available limit.
  • Your utilization ratio comprises 30% of your FICO score and is also an influential factor in your VantageScore.

The health of a credit score depends on several factors. So even if your utilization ratio goes above 30% for a brief period, it may not severely affect your score if the other factors are viewed as positive. However, it will be affected if you have too many inquiries on your credit report or you miss monthly payments. 

Read more:

How To Read Your Credit Report
How To Remove Negative Info From Credit Report

Other Ways To Improve Your Credit Score

Check your score online, which will give you an idea of factors that are having an effect. You can then take steps to make improvements. Here are some tips to help you achieve that.

  1. Pay Your Bills On Time - When you borrow, lenders want to check how dedicated you are towards your repayment schedules. Your chances of qualifying for a loan increase if you have a good repayment track record.
  2. Clear Debts & Demonstrate Responsibility - A utilization ratio of 30% or less is a good indicator of how well you manage your finances. Lenders like borrowers who can display good financial management. You can use a debt payoff planner to manage your outstanding totals.
  3. Use New Accounts Wisely - There will be inquiries by the lender when you apply for a new account, which temporarily lowers your score. Also, more credit accounts mean there is the temptation to overspend and accumulate further debt.
  4. Keep Your Unused Cards Open -If they do not require you to pay annual fees for unused cards, it is best to let them remain open. Closing an account will raise your utilization ratio.

Bottom Line

The calculation of a credit score is complex, as it varies by the different agencies. Several factors affect your score, out of which the utilization ratio is very important.

In short, pay your bills on time, keep your card debt low, and avoid applying randomly for new funds. This will help you keep your utilization ratio low and gradually raise your score. If you are seeking more ways to build credit, you can also opt for a credit builder loan to keep working towards a better score.