If you already know what credit utilization is, you’re probably on the way to building great credit. It’s the percentage of your available credit that you’re using, and it’s a major factor in most credit scoring models. You may have also heard it called the “debt-to-limit” ratio.
Credit scoring models usually see lower credit utilization as better… but can your credit utilization be too low?
In general, you will earn more credit score points if you’re using 1% of your available credit than if you have 0% utilization. If you’re not getting the full number of points available for utilization, some may consider that “hurting” your credit scores, but as long as you’re sticking to the fundamentals of good credit and generally keeping your utilization low you will probably be in good shape anyway. Read on to learn more about how utilization is calculated and how you can manipulate it to your advantage.
What counts as the balance in credit utilization?
Typically, the balance reported to credit bureaus is your account’s balance on the statement closing date. To learn more about credit card billing cycles and how to determine that date, see our guide to paying a credit card.
If you pay your bill in full by the due date every month, this balance that gets reported is generally the total of all the new transactions on your account since your last statement closed, minus any payments you’ve made. If you want to reduce this balance that gets reported, keep reading.
How can I have exactly 1% utilization?
Aiming for exactly 1% is possible, but in my opinion, it’s not always practical. As long as you’re keeping your overall utilization somewhere in the 1-10% range you should be in pretty good shape.
But let’s say you spent a lot on your credit card last month, and you’re worried that will result in high utilization on your credit reports. For example, let’s say you have a credit limit of $10,000 on a card, and you spent $3,000 in new purchases last month.
If you make a payment of $2,900 before your statement closing date, a $100 balance should end up on your credit report for the account, which is exactly 1%. In practice, the numbers don’t always work out so evenly, but you can use the same technique to reduce the reported balance.
If you make a payment of $3,000 before your statement closing date instead, a $0 balance would likely end up on your credit report for this account. That would result in 0% utilization. This isn’t usually a big deal, but you won’t earn as many points in your credit score than if you had 1% credit utilization.
Generally, if you’re worried you have high utilization, you could make a payment before the statement closing date. Don’t sweat it too much if you have high utilization for a month or two, though. Your utilization is based on the currently reported credit limits and balances. As long as your balances are lower or your credit limits are higher in the near future, the points you get from utilization will bounce back.
You don’t need to pay interest
I’ve heard the myth that carrying a balance and paying interest for a few months then paying off the balance shows lenders that you’re more responsible. This isn’t true.
Showing a balance on your credit report is not the same as carrying a balance. If you use a credit card regularly and pay the total new balance on time (on the due date, for example) every month, you’ll still end up with a balance reported on your credit reports. The only way you’ll end up with 0% utilization on a card is if you’ve paid off a card and not used it for several billing cycles, or if you pay the entire balance off before the statement closing date.
Are you on a mission to get a perfect credit score?
At 0% utilization, you won’t get all the credit score points available, but you’re not really “hurting” your credit much.
Once you have a FICO or VantageScore above 750, your credit is already in great shape. Lenders will likely give you some of their best terms at that level.
If you’re pursuing a “perfect” 850 credit score, hitting exactly 1% utilization may help you get there, but getting a “perfect” credit score isn’t necessary to get the best deals from lenders.
Credit scoring models are very complex, and if you try to manipulate them to get those last ~50-100 points, you may end up doing more damage than good. In general, if you stick to the fundamentals of building and maintaining good credit, you should be in good shape.
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