30% Credit Utilization Rule [Truth or Myth?]

By: Yara Pollard

If you’ve looked into how you can improve your credit score, you’ll know the five factors that determine it. To give you a quick review, here are the five components that determine your (FICO) credit score:

  1. Payment history
  2. Credit Utilization
  3. Length of Credit History
  4. New Credit
  5. Credit Mix

Payment history makes up 35% of the total credit score and is the biggest factor among the rest. This is your credit payment record and it allows lenders and creditors to assess if you are a lending risk. 

Having late or missed payments can have a great impact on your credit score. If you are wanting to improve your credit score, you need to be diligent with paying on time. According to Tommy Lee, principal scientist at FICO,

“FICO scores consider the frequency, recency and severity of reported missing payments.” If you’re still confused about FICO and credit score, FICO is just a type of credit score that was created by the Fair Isaac Corporation. 

According to FICO, “the FICO® Score is used by 90 of the top 100 largest US lending institutions for their risk assessment needs.”

The second factor is credit utilization which is just second to payment history comprising 30% of your total credit score. According to Credit Cards, FICO views these types of borrowers as people who can’t handle their debt in a responsible manner:

  • Borrowers who max out credit cards often.
  • Borrowers who get close to their credit limits.

This means that having a low credit balance should be your goal if you want to improve your credit score. The question is, just how low should you keep your credit balance? This is where the 30% credit utilization rule comes in. 

Is the 30% Credit Utilization Rule a Myth?

If you look it up on the internet, you’ll find that a lot of sites suggest having a credit balance not going over 30%. This is what the 30% credit utilization rule is all about. 

To give you an example, for a credit card with a $2,000 limit, the balance should just be below $600. However, can this impact your credit score in a positive manner or is there no need to follow such a rule to improve your credit score? 

We’ve done our research and we’ve found that there is some truth to this. Here’s what two authorities in credit scores have to say about credit utilization:

  • “Consumers with FICO scores of 800 use, on average, 7% of their available credit.” – Can Arkali, Principal Scientist at Fair ISAAC Corp.
  • “The 30% level is not a target, but rather is a maximum limit. Exceeding that level will have significantly negative impact on credit scores.” – Rod Griffin, Experian’s Director of Public Education

As we’ve cited earlier, FICO considers people who max out their credit cards often and people who get close to their credit limits as lending risks. With this, there should be a threshold wherein you won’t be categorized as a risk. 

This threshold is using just less than 30% of your credit balance. Moreover, people with excellent credit scores have low credit balance. But will your credit score plummet if you exceed 30% credit utilization? 

The Truth About Credit Utilization

The lower your credit utilization, the better. That’s the truth about credit utilization. If you exceed 30%, that doesn’t mean your credit score will drop in a significant manner. Here’s why using over 30% of your credit balance can be alright.

  1. Points assigned could be different for individual cards and combined account percentages. This means that while your score could change because of your utilization with one card, it might still not if the average utilization rate of all your cards combined still has the same percentage.
  2. Multiple credit scoring system – each have their own different set of factors to determine credit score.
  3. Your credit utilization could change overtime. 

Again, the lower your credit utilization, the better. Just because going over 30% of your credit balance may not harm your credit score, it doesn’t mean that you can use your Target red card and all other types of credit cards more often. Just use them when they are needed. 

Payment history and credit utilization together make up two-thirds of the credit score. With whatever you do, make sure to pay on time and not use too much of your credit balance. The advantage of using credit cards can be convenience but they can be inconvenient if you use more than you can pay.

You need to know about the credit card Do’s and Don’ts for you to steer clear from having issues with your credit cards. Otherwise, you can also become a victim of the 3 common causes of credit card fraud

Is the 30% credit utilization rule truth or myth? By now, you should already know the answer. Using less than 30% of your credit balance is a guideline. It can impact your credit score and it’s good to follow this rule to ensure your credit score won’t drop. 

We hope we’ve helped you know more about the 30% credit utilization rule. Share this with your friends and family so they may also know more about credit utilization and improving their credit scores. 

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