What's the deal with 30% or less credit card utilization? Myth or Matter of Fact?
Over the last two decades, access to information and financial literacy has grown substantially. With the availability of blogs, articles, online resources, websites, apps, and more, consumers are taking more time to learn more about managing their finances, the importance of managing their credit, and attaining a healthy FICO® Score. Along with the good and accurate information at our fingertips, the information age undoubtedly circulates a few inaccuracies including the ideal amount of credit to use before negatively impacting their FICO® Score.
When it comes to building and maintaining a healthy FICO® Score, FICO informs us that there are five key ingredients measured:
- Payment history
- Utilization (outstanding debt, or the amount of credit a consumer is using)
- Credit History Length
- Pursuit of new credit
- Our overall credit mix
The largest two categories, payment history, and credit utilization account for 65% of a FICO® Score - meaning management of these two areas is critical to achieving a healthy FICO® Score.
Managing payment history, well, that's easy – pay bills on time! But what about credit utilization? That one seems tricky. Is it 30%, 20%, 10%? How much credit should someone use? What's the right percentage?
To start my research, I headed online and began by searching "What's a good credit utilization ratio". Bang! 30%, there it is. The very first article I'm presented suggests that 30% or less is generally the amount of credit I can use on my credit card to maintain a healthy FICO® Score. I continue to the article and found that the author points out that 30% of my FICO® Score is represented by the amount of credit I'm using. This, in fact, is true.
I continue reading and learn, that generally speaking, good credit utilization is a ratio (or percentage) less than 30 percent. Being the curious researcher, I continue the article and review their sources to understand where the magic ratio of 30% utilization is derived. Ah-ha! I'm pointed to another article, that authoritatively shares "You want to keep your credit utilization under 30 percent." This, unfortunately, is a myth.
As a matter of fact, there is not a magic percentage or maximum ratio of credit utilization required to attain or maintain a healthy FICO® Score. In general, the lower the ratio of credit used to credit limit the better, as lower utilization means less credit risk and has a positive effect on a FICO® Score. While lenders determine how much credit they are willing to provide, you control how much you use. FICO's research shows that people using a high percentage of their available credit are more likely to have trouble making payments now or in the near future, compared to people using a lower level of available credit.
The researcher in me concludes that whether the myth of 30% utilization or less stemmed from the fact that 30% of a FICO® Score is based upon their credit utilization, or simply from years of inaccurate information circulating from trusted advisors or the internet, it's important to understand that the less credit used the better. If you're currently using a lot of credit, aim to reduce or pay off balances. If you need to use your credit card, do so, that's what they're for, but do so responsibly by paying your balances in full, or working to pay them off as fast as possible.