October 31st, 2012
Credit Report Card Break-Down: Open Credit Card Utilization
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Your open credit card utilization is the percentage of your credit limits that you’re using at any given time. It can be calculated by dividing your credit card balances by your credit limits.
It’s a metric used by most credit score models to help assess your creditworthiness.
How does credit utilization affect my credit?
Generally, the higher your utilization (the more credit card debt you have), the lower your credit score. However, it’s interesting to note that a utilization of “0” isn’t necessarily a marker of a good credit score. If you don’t show any credit card activity, creditors have no recent credit history on which to base their lending decisions.
Let’s take a look at Credit Karma’s credit data to see how utilization affects your credit score. A couple of years ago we looked at profiles of credit score ranges and translated the data into an infographic. In this graphic, we found that even the highest credit score members carried at least some credit card debt. At the time, Credit Karma members with a credit score of 800 or higher had an average credit limit of $78,377 and an average credit card debt load of $5,429, putting their collective average utilization rate at 6.93 percent.
Conversely, Credit Karma members with the lowest credit scores (lower than 500) had an average credit limit of $2,938 and an average credit card debt of $3,520, leaving them with an astounding credit utilization rate of 119.81 percent.
Let’s take another example. In the grade distribution chart in the Credit Report Card, you can see that Credit Karma members with 0 percent utilization have on average a 658 credit score and a grade of “C,” while those who show just a little credit card use (between 1 and 20 percent utilization) average a 731 credit score, giving them a grade of “A.”
What can I do?
Now that we’ve reviewed the data, let’s talk about the strategies to can take to get that “A” grade on your Credit Report Card:
- Calculate your utilization rate cap. Find out what 30 percent of your current credit limits is—that’s the number you want to remember. For instance, if you have a combined credit limit of $3,000, your ideal rate would be $1,000.
- Always stay BELOW that number. Now that you know your utilization rate cap, stay below that number at all times. Remember that you don’t need to charge 30 percent of your limits. You just need to make sure you don’t go above that limit if possible. And if your credit limits increase, that shouldn’t be a temptation to spend more.
- Keep your cards active. Using your credit cards regularly is one of the best ways to build credit. Plus, did you know that some credit card issuers will stop reporting your credit card activity if your cards remain dormant for a while? Charge just a little each month, but remember to pay off your balances in full each month, too.
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