Credit Scores | Credit Usage
How close are you to maxing out? Try staying under 30%
TLDR; The lower our balance is, the better. This applies to single cards and across all of our accounts.
Credit usage or utilization ranks similarly to credit history in determining our credit scores, which means it matters less than payment history.
The way this is calculated is by taking your credit card balance and dividing that by your credit limit, which is the maximum you can put on a card.
Some credit cards have no credit limit and instead function as charge cards, which have a hidden limit the bank automatically adjusts based on your spending. Amex does this often.
There are a few ways this factor is often used:
- Individual credit card usage
- Total account utilization, or total balance over the total credit limit
The motivation behind this component is that banks want to know you’re not pushing the limit of your finances and stretching yourself too thin.
They don’t care here whether you have the ability to pay it off, just getting close to the max limit is a warning sign to banks.
According to Chase, credit utilization makes up about 20% of our overall score.
Credit Karma has the following ratings for overall credit utilization:
You can see that Good or better requires under a 30% credit utilization.
In fact, Chase has an effectively identical recommendation:
However, what matters most for this factor is credit use on each individual card.
This leads us to a few optimizations and guidelines.
If you have multiple credit cards, try to spread out purchases so the utilization on a single card doesn’t get too high.
The key to multiple cards is to stay organized enough to ensure that no payment is missed. Remember late payments hurt the most, so avoid that at all costs.
When an expensive purchase comes up, put it on the credit card with the lowest balance or largest limit (if the rewards are the same).
Alternatively, we can increase the denominator, our total credit limit.
I’m naturally lazy, so I’ve made an effort to get to the point where my total credit limit is large enough that I should never exceed 5% utilization even if I’m not paying attention.
On individual cards, we can request credit line increases or open new credit cards which both increase our total credit limit.
Be careful with requesting a credit line increases as this can sometimes trigger a hard inquiry, so check before you pull the trigger.
If the above is too much micromanaging, then simply keep overall utilization under 30% at all times.
Easier said than done for those who carry high balances, but steadily paying down those balances will improve utilization and boost credit scores.
Before we wrap up, I want to get a common misconception out of the way.
You do not need to carry a balance to build credit.
In fact, carrying a balance is a great way to rack up interest after the 30-day grace period or even accidentally miss a payment.
Lenders just want to know we’re not dangerously close to running out of credit and getting into financial trouble.
It might seem difficult if you have a limited credit line, but as you build credit, your total credit limit will follow and it will only get easier.
At the end of the day, the easiest way to keep utilization low is to have good spending habits and pay off our balances regularly.
This post was ported over from my Substack series