Using no more than 30% of your credit limits is a guideline — and using less is better for your score.
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Many credit experts say you should keep your credit utilization ratio — the percentage of your total credit that you use — below 30% to maintain a good or excellent credit score.
If you want to improve your credit score, you should pay attention to how much credit you use. The 30% rule is a good starting point, but remember that using even less is better for your score.
Keeping up with what percentage of your credit limits youre using is easier than you may think. You can set up alerts with your credit card issuers to track your balances. Or sign up for a free credit score that displays utilization rates.
An important part of figuring out your credit score is your credit utilization ratio, which is the difference between how much credit you are using and how much credit you have available. In particular, how you use your credit accounts accounts for about 30% of your FICO score.
Many experts recommend keeping your credit utilization below 30%. Some even say lower is better. Are you worried that using 20% or more of your available credit will hurt your credit? Let’s take a closer look.
What is Credit Utilization and How is it Calculated?
Your credit utilization ratio shows lenders what percentage of your available credit you are using. For example if you have a total credit limit of $10000 across all your credit cards and your current balance on all cards totals $4,000, your credit utilization is 40% ($4,000/$10,000).
Credit utilization is calculated a couple of ways:
- Individual credit card utilization – Balance divided by credit limit on each card
- Overall utilization – Total balances on all cards divided by total credit limits
Both your individual and overall utilization are important factors in your credit score. You want to keep both numbers low.
How High is Too High For Credit Utilization?
The general guideline is to keep your credit utilization below 30%. However, lower is better when it comes to this ratio. Here’s a quick rundown of how different utilization percentages generally impact your credit:
- 0-9% – Excellent utilization. May slightly boost credit scores.
- 10-29% – Good utilization. Helps maintain excellent credit.
- 30-49% – Fair utilization. Scores start decreasing as you approach 50%.
- 50%+ – Poor utilization. Drastically reduces credit scores.
As you can see, a utilization of 40% falls into the fair range. It likely won’t tank your credit scores, but it’s not ideal either
Why is Credit Utilization Important For Your Credit Score?
Potential lenders see you as a riskier borrower if you use a lot of credit. You might feel like you depend too much on loans and credit cards if you use a lot of your available credit. It also appears you could be stretched thin financially.
Lenders like it when borrowers only use a small amount of their credit. It gives them confidence you can easily handle additional credit.
That’s why it’s so important to keep your credit utilization low if you want excellent credit scores.
How Long Does High Utilization Impact Your Credit Score?
The good news is high utilization won’t permanently damage your credit score in most cases.
For FICO scores and most other credit scoring models, your utilization is evaluated based on your latest reported card balances. As soon as you pay down balances and your credit card company reports the lower amounts to the credit bureaus, your credit utilization will decrease accordingly.
This means if you have a month with unusually high spending that pushes your utilization over 40%, your score will recover quickly once that balance comes back down.
However, a new type of FICO score called FICO 10 uses trended data from the past 24 months when calculating utilization. With this model, a history of high balances could hurt your credit score even if your current utilization is low.
Tips For Decreasing Your Credit Utilization
If you find your credit utilization creeping above 30%, there are several strategies you can use to bring it back down:
- Pay down balances – The quickest way to lower utilization is to pay down card balances. Even paying a portion can help.
- Ask for credit limit increases – Higher credit limits means lower utilization.
- Open a new card – A new card adds to your overall limits.
- Consolidate debt – Moving balances to a debt consolidation loan can help.
- Don’t close old cards – Keeping accounts open preserves available credit.
- Make multiple payments – Pay charges early to avoid high statement balances.
Is 40% Credit Utilization Bad? The Bottom Line
A credit utilization above 30% and approaching 50% is not ideal and may cause a slight dip in your credit scores. However, as long as you bring the balances back down quickly, the impact should not be lasting.
It’s smart to keep utilization below 30% whenever possible. But an occasional spike over that threshold likely won’t devastate your credit as long as your overall credit profile remains strong. Monitoring your utilization and keeping balances low over the long-term is key.
Is 0% credit utilization bad?
In general, using as little of your credit card limits as possible is better for your scores. So logic would suggest that paying off your credit cards early so that a zero balance is reported to the credit bureaus would produce the highest scores. But using 1% of your credit limits may help your credit scores even more than 0% usage.
Credit scoring systems are designed to predict how likely you are to repay borrowed money. The two biggest credit factors — accounting for about two-thirds of your scores — are paying on time and the amount you owe.
If you are trying to squeeze every possible point from credit utilization, the trick is to aim low — just above zero. Credit expert John Ulzheimer says that data has shown that 1% credit utilization predicts slightly less risk than 0%, and scoring models reflect that.
Tommy Lee, a senior director at FICO, one of the two dominant credit scores, explains it this way: “Having a low utilization indicates you are using credit in a responsible manner.”
How much of my credit card should I use?
Keeping your credit utilization at no more than 30% can help protect your credit. If your credit card has a $1,000 limit, that means you’ll want to have a maximum balance of $300.
Why the 30% rule? It’s likely because the recommendation to keep your credit utilization low invariably prompts the question, “How low?” Having a number gives you an upper limit when thinking about how much to spend on your credit cards.
The 30% answer finds backing from the credit bureau Experian: “The 30% level is not a target, but rather is a maximum limit. Exceeding that level will have significantly negative impact on credit scores,” says Rod Griffin, Experian’s senior director of public education and advocacy. “The lower a person’s utilization rate, the better from a scoring standpoint.”
Is High Credit Utilization Bad? – CreditGuide360.com
FAQ
Is 40% credit usage bad?
The less of your available credit you use, the better it is for your credit score (assuming you are also paying on time). Most experts recommend using no more than 30% of available credit on any card. Our calculator shows you where you stand.
What if I use 40% of my credit limit?
Yes, high credit utilisation is bad for your credit score. In general, it is advised to keep the utilisation under 30% of the overall credit limit. However, if it is not possible to keep it under 30%, it is advised to keep it at least under 50% at any cost.
What happens if you use 50% of your credit card?
Is 50% credit utilization good? A 50% credit utilization ratio is not ideal. This means you are using half your available credit and may signal to lenders that you’re having trouble paying off your debts or revolving your debt from month to month.
Is 35% credit utilization ok?
Optimal range: Keeping your credit utilization below 10% is ideal for maximizing this component of your credit score. This could potentially boost your score by 10-50 points compared to higher utilization rates. Acceptable range: Utilization between 10-30% is generally considered good.