It’s no secret that debts recorded on your credit reports can influence your credit scores. And, it’s also no secret that your credit score is more heavily impacted by credit card debt than installment debts, such as auto loans and mortgages. So how can you best continue to use credit cards without causing an adverse impact to your credit scores? The answer is controlling your utilization percentage.
First off, what is the utilization percentage? The utilization percentage, also referred to as the debt-to-limit ratio, represents the amount of your aggregate credit card debt divided by your aggregate credit limits on your credit card accounts. For example, if you have three credit cards, each with a $1,000 balance and a $2,000 credit limit, then your debt-to-limit ratio is 50% because $3,000 divided by $6,000 is 0.5. Add the balances on the credit card accounts and divide that figure ($3,000) by the sum of the credit limits ($6,000). The lower this percentage, the better it’s going to be for your scores.
The million-dollar question that seems to have many answers is, “What is the highest debt-to-credit limit ratio that won’t lower my credit score?” The answer to that question, as it is with almost all credit scoring questions, is “that depends.” VantageScore experts routinely recommend that consumers keep levels at or below 30 percent, and various articles advise levels from 10 percent to 50 percent. The optimal ratio always will be as close to zero percent as possible, but it’s still possible to have elite credit scores with higher ratios.
One thing to consider as you’re contemplating the issue of the debt-to-limit ratio is how the scoring models come to understand your balances and credit limits. They receive information about your credit card accounts from your credit reports. So, the balance and limit amounts on your credit reports are going to be the figures used in the calculation of your utilization ratios. This is important to keep in mind because some consumers mistakenly believe the ratio is based on whatever your balances happen to be at the moment a score is calculated. If you make an electronic payment today to pay down an outstanding balance, your lower utilization ratio probably won’t be reflected in a credit score pulled tomorrow because it takes time for your lender to report the change in balance to the three major credit reporting companies (Equifax, Experian and TransUnion) and for that lower balance to be reflected in your credit report.
If you’re able to control your usage percentage to the point that you can pick and choose what that percentage is going to be in any given month, then you probably have the ability to pay your balance in full rather than carrying a balance from one month to the next. And, if you are going to pay your balance in full by the due date, consider instead paying it in full by the statement closing date, which is the date on which your billing cycle ends, your balance is determined and your monthly statement is cut. If you time your payments in this manner on a regular basis, you can maintain a zero balance on your statement. In addition, because credit card issuers generally report your statement balance to the credit reporting companies, a zero balance on your statement should soon equate to a zero balance on your credit reports, which is fantastic for your credit scores.
You always should shoot for the lowest utilization percentage that’s realistic for you. If the best you can manage is 80 percent, at least it’s better than 90 percent. Hold to that, and strive to get 70 percent, then 60 percent, and so on. Generally speaking, the people who have the highest scores have a utilization percentage below 10 percent.
If, however, you fall in love with any one target percentage, such as 30 percent or 50 percent, you run the risk of shooting either too high or too low because there is no one magic number that fits everyone. The presence or absence of other types of credit-related transactions in your credit file can affect the degree of influence that percent-utilization has on your score. Of course, sources in the industry are going to give you a general idea of what that utilization level should be, but with over 200 million people with scoreable credit files it’s not as simple as just saying everyone should focus on any one percentage. That’s simply not realistic. But if you keep your utilization level at or below 30 percent, as VantageScore recommends, that percentage will prevent most consumers’ scores from dropping, and that’s why VantageScore uses it as a guideline.