What Is a Good Credit Usage Percentage?
A good credit utilization is below 30% in many experts‘ eyes, but it‘s not the best you can do.
Contributing Writer at Tally
July 15, 2022
Experian data recently found that the average credit usage rate — the credit utilization ratio — dropped by four points from 29% to 25% from 2019 to 2021. The 25% ratio is the lowest credit utilization ratio in the last decade.
Reducing the rate of credit usage is beneficial. Not only does it increase your available credit for future purchases, but it could also raise your credit score. Credit utilization ratio is one of the primary factors determining FICO and Vantage Score credit scores.
So, what is a good credit usage percentage? We’ll answer this question and discuss how credit usage impacts your credit score.
What is a good credit usage percentage?
Generally, the lower credit utilization rate you have, the better it is for your FICO credit score, but most experts agree that a good credit utilization rate is anything below 30%.
There is some debate about this number amongst financial experts, but this seems to be the rule of thumb set forth by the credit bureaus. Keeping your credit usage below 30% reflects well in credit scoring models.
Of course, getting that credit utilization rate into the single digits is even better and can earn you an excellent credit score, but that takes time.
Is it good to have a 0% credit utilization?
While a lower credit utilization rate is better, you don't necessarily want a 0% credit utilization rate. When your credit card issuer or lender reports a zero balance to the bureaus, it reflects that the card is not in use, which could lead to the credit card issuer closing the account. Closing accounts can make it more challenging to build a good credit score.
Also, with a 0% utilization rate, some credit scoring models view the credit card as unused. These models prefer to see you using a card responsibly by maintaining a low credit utilization ratio.
Is a 1% credit utilization best?
Many credit experts believe you should keep your credit utilization below 10% but at least 1%. Going by the rule that lower is better, the ideal credit utilization ratio is 1%. However, as long as you’re under 10%, you have a good credit utilization ratio and are in great shape for most credit scoring models.
How do you determine your credit utilization rate?
Credit usage measures how much of your available credit you are using. The figure only takes revolving credit into account.
Revolving credit allows you to borrow money up to a credit limit repeatedly. Examples of revolving credit accounts include credit cards and lines of credit. Your credit usage does not refer to debts like mortgages or auto loans, which are for a lump-sum amount.
To figure out your credit usage, divide how much credit you're using by how much credit you have available.
Let's say you have two credit card accounts and a line of credit in your name. Your:
American Express card has a limit of $10,000, with a $5,000 balance
Chase card has a total credit limit of $12,000, with a balance of $5,000
Line of credit is worth $8,000, and you have used $5,000
If you add $10,000, $12,000 and $8,000, you find that your total available credit is $30,000. That is the maximum amount that your lenders allow you to borrow.
If you add your two credit card balances of $5,000 and $5,000 and your line of credit balance of $5,000, you find that your total credit used is $15,000.
Divide $15,000 by $30,000 and multiply by 100 to receive your credit utilization rate of 50%. You are currently using half of your revolving credit.
Why is credit usage percentage important?
Your credit utilization rate is important because it impacts your credit report and credit score. Each month, your credit card companies and lenders report your balances to the credit bureaus. The bureaus use this information to craft your credit score using one of the various scoring models, such as FICO or VantageScore.
Your credit score is a three-digit number that determines your creditworthiness and helps lenders decide:
Whether they should lend you money
The amount of money to lend
What interest rate and terms the loan should have
Your credit utilization is one factor determining your FICO credit score. Credit usage is responsible for 30% of your FICO Score, so keeping a high credit utilization rate can lead to a lower credit score.
Similarly, your overall credit utilization also plays a role in determining your VantageScore, the other type of credit score. Though VantageScore does not provide the exact weighted percentages used to derive its scores, your credit usage remains an important factor. The amount of credit you’ve used is considered "Highly Influential" by VantageScore.
Keeping your credit utilization rate low demonstrates to lenders that you can manage your personal finances.
What can you do to improve your credit card utilization percentage?
If you have a high rate of credit usage, there are a few things that you can do to help improve your situation.
Pay down your debt
One way to improve your credit usage is by paying down credit card debt and your lines of credit. When doing so, try to avoid putting new purchases on the card. Otherwise, your balances will remain high, and your credit utilization rate will not improve.
Also, remember that it takes at least one billing cycle for changes to show up in your credit history. For instance, if you pay down debt in January, you likely won't see this reflected on your credit card until your February statement. Then, the information is sent to the credit bureaus, where it then shows on your credit score.
It's important that you demonstrate a history of paying down debt. Changes to your credit score will not happen overnight.
If you're looking for further assistance, consider using other financial products, such as balance transfer credit cards or personal loans for debt consolidation, to accelerate paying down your balances.
Ask for a credit limit increase
If you have a strong payment history, consider asking your lender for a higher credit limit.
Let's say that your credit card limit is $5,000 and your total balance is $3,000, equating to a 60% credit utilization ratio. If you have a decent credit score and demonstrate to your lender that you can make on-time payments, your lender may be willing to grant you a credit limit increase.
If you qualify for a $3,000 credit limit increase, giving you an $8,000 credit limit, you’ve brought your credit utilization ratio on that credit card to 37.5% without lowering its current balance.
Many credit card companies allow you to apply for a credit limit increase online or in their mobile app. All you need to do is provide a bit of personal information.
If rejected initially, don't hesitate to call your lender and negotiate a higher credit limit.
Use an app like Tally
Another tool available to help reduce credit usage is Tally. Tally† is a credit card payoff app that helps you pay down debt efficiently. Tally offers a low-interest line of credit to help you pay off existing balances, reducing your debt and credit usage percentage.
Reduce your credit usage and improve your financial situation
The terms "credit usage percentage" or "credit utilization rate" mean the same thing and reflect how much of your credit you are using.
Naturally, it makes sense to wonder, "What is a good credit usage percentage?" A good credit usage percentage is between 1% and 10%, though a broader target is 1% to less than 30%.
Should you have a high credit utilization rate, there are a few things that you can do to improve it. You can pay down debt, request a credit line increase or consider using Tally to pay off your balances efficiently.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.