Card utilization made easy: lower is better, and something is better than nothing

This post originally appeared September 25, 2014, on CreditCards.com as “Forget the 30 percent utilization ‘rule’ – it’s a myth

By Barry Paperno

Dear Speaking of Credit,
My questions are about the 30 percent credit utilization rule. I keep reading elsewhere that you have to keep your credit use below 30 percent of available credit if you want a good score. I guess my main question is, is it really a rule at all? At 29 percent credit utilization, my credit score is fine, but if I hit 30, boom! It falls off a cliff? Or is it just a sliding scale, with 70 percent utilization terrible, 50 percent bad, 30 percent OK, 10 percent really good and 0 percent best? — SuziT

Dear SuziT,
This is a great question that touches on one of my all time credit scoring pet peeves. Having become familiar with many of the inner workings of the FICO scoring formula over the years, I can tell you that a credit utilization percentage “threshold” is more like the sliding scale you describe than a hard-and-fast rule where, as you say, being one point over the magic number sends your score off a cliff.

With credit scoring, it’s important to understand that mathematical calculations, based on data reflecting the experiences of millions of consumers and designed to predict future credit risk, don’t necessarily result in easy-to-remember numbers, like 30 or 50 percent, that can be applied universally. The way it works in practice, since there’s not much additional predictive value to assigning different numbers of points at every single percentage point along the 0-100 percent spectrum, is that the scoring formula assigns points according to ranges of percentages. The lower the percentage range, the more points awarded. This is why there’s no “boom” when your utilization hits 30 percent, unless in doing so your utilization percentage has moved to new range that offers fewer points.

There are additional reasons why a single one-size-fits-all utilization percentage cut-off cannot realistically apply to credit scoring and why that’s OK:

  • A particular utilization range may have points assigned differently for individual cards than for combined account percentages. For example, your score might change when utilization on an individual card reaches a certain percentage range, yet it might not change when the average of all your cards combined hits that same percentage or range.
  • Utilization ranges and points that apply to one person’s credit experience may not necessarily apply to a different set of experiences. That’s due to the “multiple score card” system, by which credit scores use different scoring factors and different weighting of the factors for different sets of credit experiences. Furthermore, the same set of utilization measures might not always apply in the same way to the same person, as the indicators of credit experience, such as length of credit history, number of accounts, payment history, etc., change over time.
  • Whether talking about utilization or any other set of credit scoring factors, we should never expect to see actual numbers, such as 30 percent, since this level of detail would only be meaningful when actually calculating scores, which, of course, requires much more information and analytical ability than any non-mathematician without access to credit bureau data and proprietary scoring formulas can be expected to have.

The closest we can come to a rule that applies universally to utilization percentages, whether considering a single card or all cards combined, is:  The lower your credit utilization is, the better — but it’s better to have something (a percentage higher than 0) than nothing.

Why higher than 0 percent? Going back to the idea that the percentage ranges are based on research into the behavior of millions of consumers, it turns out that the risk of default has actually been found to be a little higher at 0 percent utilization than at slightly higher-than-0 percentages. The main reason for this odd occurrence is that a $0 balance — which leads to 0 percent utilization — is often the result of not using credit regularly, which research has shown to indicate higher future risk. That’s right, not being in debt makes you a higher risk. Go figure.

This is not to say, however, that there isn’t some value in the oversimplified mantra of keeping utilization under 30 percent, although, to be more consistent with the actual workings of the score, I recommend 25 percent as this threshold.

Just as it’s a good diet motivator to set some challenging-but-achievable weight benchmarks and adjust them as you go until you arrive at the ultimate goal, the same methodology for reducing your credit utilization can also work to your advantage. For example, if you’re maxed out on your cards and can’t pay them off right away, first shoot for 75 percent, then try for 50 percent, and so on, until your utilization drops down into the single digits.

Lastly, anytime we talk about on the complexity of credit scoring, it’s also helpful to remind ourselves that while the scoring formula is indeed a complicated set of mathematical calculations, achieving a good score boils down to following a simple and common-sensical set of three rules:

1. Pay on time.
2. Keep card debt low.
3. Apply for new credit only when needed.

And for good measure I’ll add a fourth rule, since we’re talking about credit utilization: Lower is better, and something is better than nothing.

Hope this helps. Thanks for writing!

Have a question, comment, topic idea, random thought? I’d love to hear from you!

4 thoughts on “Card utilization made easy: lower is better, and something is better than nothing

  1. Damon

    Hi Barry- when you say something is better than nothing. Do you mean as an aggregate utilization? Or should we have a small balance on each card? I have 3%, 0% and 0% on my 3 cards and it didn’t seem to help that much when they were all averaging about 17% the month before.

    Reply
    1. Barry Paperno Post author

      Hi Damon,
      The impact to your score will only be on the aggregate level, but, of course, that will mean at least one card will need a small amount to show on a billing statement. I guess I’m a little surprised you didn’t see much improvement when dropping from 17% to probably around 1%, but then 17% isn’t all that high to begin with. How much of a score increase, if any, did you see with that drop in utilization?

      Reply
      1. Damon

        Barry-

        My FICO over last 3 months:
        Dec – 723 (17% util)
        Jan – 689 (35% util)
        Feb – 710 (1% util)

        The short version is I used my credit cards for the holidays and my cards reported close to a 35% aggregate in Jan. So, my score dropped down to 689 (34 POINTS!). The following month I was aggressive about paying them down and following the “1-0-0” rule (1% on one card & zero on the other 2). This brought my score back up to 710. So, not back up to it’s original 723, which I don’t quite understand since I surpassed my Dec utilization of 12%. Is it possible I could see another move up on my score next month… as if FICO is making sure this 1% util isn’t an anomaly?
        Thanks again for responding!

  2. Barry Paperno Post author

    Here is where trying to find 13 points you used to have can get a bit murky, largely due to the “moving target” nature of credit scoring.

    If you haven’t done any of the obvious things, like opening new accounts, paying off loans or closing paid-off cards during those few months, the answer could lie in scorecard changes brought on by such things as the aging of newest or oldest account, or if an old closed account, last old delinquency or public record has fallen off the credit report.

    Scorecard changes result in a reshuffling of the score factors and points associated with them, that can often cause “better looking” credit to score lower, at least temporarily, before ultimately taking your score higher in the long run. If that’s the case, I’d be surprised if you didn’t regain those 13 points within the next few months, all other things remaining the same.

    A couple more questions for you:

    * What’s the open date of your newest account?
    * Any late payments or negative items of any kind anywhere on the credit report? If so, how old is the most recent occurrence?

    Feel free to throw any further questions my way or provide additional details, i.e. changes in reason codes, that might help point to what’s going on with your score.

    Reply

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