30% Credit Utilization Rule: Truth or Myth?

Credit card utilization refers to the ratio of how much you owe to your credit limit on your credit card. This plays a key role in your credit rating’s calculation. Based on FICO(R), the maintainers and creators of FICO credit score model, this is 30% of your credit score. A quick search online will make you discover that many experts tout the rule that you can maximize your credit score when you keep your credit utilization below 30%. But, is this really true, or is it just a myth?

Importance of Credit Utilization to Your Credit Score

It may sound a bit counterintuitive if you will be punished because of your high credit utilization. After all, why will lenders provide you a specific credit limit then give you punishment every time you use it? However, this is exactly what takes place. In figures, credit utilization is composed of 30% of your score.

But, why does credit utilization encompass a big part of your credit score calculation. There is danger associated with higher rates:

• When you have bigger debts, there is a lesser chance that you can repay them.
• Lenders feel nervous once you have used up your credit limit since if you had cash to pay your bills, there is no way that you will continue to borrow money.
• Lenders feel that a person who reaches the credit limit every month or goes beyond it doesn’t exude financial prudence.

You Don’t Fall Off a Cliff at 30% or Any Other Percent

Experts claim that there is no such thing as a magic number such as 30% wherein your credit will take a nosedive once you go beyond it or skyrockets if you go under it. As far as credit scoring is concerned, it is a must to understand that the mathematical calculations, according to the data which reflect the experiences of the millions of consumers and meant to predict potential credit risks, don’t basically lead to easy to recall numbers such as 30% or 50%, which could be assigned universally.

Where Does Credit Utilization Come In?

VantageScores and FICO alike check the ranges of credit utilization percentage. The ranges depend on the four other factors in the score. In general, however, when there is a lower percentage range, your score will be assigned with more points. One your credit utilization percentage shifts to another range that could be or could not be 30 percent, your credit score is going to adjust accordingly.

Individual card uses may assign varied points compared to your overall credit utilization rate. Thus, when you have a 10% overall credit utilization rate, yet your other cards are at 60%, you will notice a drop in your points.

It’s Better to Stick with 10%

A study revealed that people who have 0% utilization were able to enjoy a relatively lower average score. This is because A 0% credit utilization rate means that the person doesn’t use credit on a regular basis, and based on research, this indicate higher risk in the future. Yes, it actually works great for your credit score to be in debt.