Of Credit Cards, Credit Utilization Ratios and Credit Scores

Credit card

Credit cards are not just modern-day conveniences for shopping and paying bills, they are practical tools for building and rebuilding credit too. It’s also through them that credit utilization ratios are known – an important factor in calculating credit scores.

Yes, your spending across all your credit cards matters on your credit score. How do you know if you have a good or bad credit utilization ratio? More importantly, how do you improve this ratio for a better credit score and loan opportunities?

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Credit Utilization Ratio: What, Why?

Credit utilization ratio is the total amount you owed on all your revolving debt (credit cards and other lines of credit) divided by the total credit limit of this revolving debt combined.

Say you owe $5,000 on two credit cards with a combined credit limit of $10,000. Using the formula above, divide $5,000 by $10,000 and multiply the result by 100. This 50% is your credit utilization ratio.

Vantage and FICO


For a moment, let’s leave that number and look into how credit scores are calculated by FICO and Vantage.

In FICO’s credit scoring models, amounts owed or credit utilization takes up 30% of a consumer’s credit score along with (i) payment history – 35%, (ii) length of credit history – 15%, (iii) credit mix – 10%, and (iv) new credit – 10%.

Vantage, on the other hand, does not offer a breakdown of its scoring system but it does classify percentage of credit limit or credit utilization as highly influential, noting that revolving balances should be kept below 30% of credit limits.

Other factors that influence a person’s Vantage scores are (a) payment history, (b) age and type of credit, (c) total balances/debt, (d) recent credit behavior and inquiries, and (e) available credit.

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30% Utilization Ratio: A Myth or Best Practice?

It’s now established that credit utilization has an important role in modern credit scores. The next thing that comes to mind is: what’s the threshold for a good or bad utilization ratio?

A quick and traditional answer is 30%. As some experts say, keep your credit card balances below 30% because anything above this number will send your score to fall.

Other experts, however, believe that the “30% credit utilization rule” is more of a rule of thumb than a hard-and-fast rule. Instead of focusing on what happens to your credit score if you go beyond 30% of your total credit limit, you can work toward a low credit utilization ratio.

Ways to Improve Your Credit Utilization

There are three things you can do to maintain a healthy credit utilization ratio:

    1. Keep your spending low on all cards. While your credit utilization ratio shows how much you owed on all your cards, it also matters to look into how much you are charging per card. For example, one credit card is carrying a 60% utilization ratio versus other cards with 20% and 10% ratio; the card with a higher balance pulls the total amount owed up.
    2. Pay in full and on time every month. You avoid incurring interest charges and keep your credit card balances at manageable levels this way. Note that making full or substantial monthly payments won’t immediately result in improved credit scores. Credit reporting companies typically update credit card balances 30 days after the billing cycle.
    3. Keep your credit cards open and think twice about closing old cards. Even when you have a card that you haven’t used for a long time, you can use its credit limit and age of credit for credit score purposes. If you close that card, you’d be lowering your total credit limit and thus raising your utilization ratio. You can also apply for new cards but do it prudently.

Ideally, the best credit utilization ratio is 0% but that’s not the reality. Here’s a practical advice in the real world: borrow only when necessary and one you can comfortably pay later on.

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