How Much of Your Credit Line To Use?

Introduction

When you get your first credit card (or your second, or third), and you’re told what your credit limit is, it’s natural to want to use the whole thing. After all, if a creditor gives you a credit line of $1,000, why shouldn’t you charge $1,000 to that card?

Well, that’s not a good idea — for a few reasons. The most obvious is that if you max out your card, and then get charged interest or some kind of fee, you could go over your limit. And that can result in more fees and penalties.

Less intuitive is the fact that you shouldn’t use even close to your full credit card limit. Even less intuitive than that is the fact that you should use less than a third of your credit line. Yes, I’m totally serious.

How Much of My Credit Line Should I Use?

If you care at all about having a good credit score, financial experts recommend you use less than 30% of your revolving credit — which includes credit cards and other lines of credit. And if possible, you should use less than 10%.

These percentages are referred to as your credit utilization ratio (CUR), sometimes called a credit utilization rate. Your CUR measures how much of your available credit you’re using at any given time.

So on that card with a $1,000 credit limit, a 30% credit utilization ratio would be $300. And a 10% CUR would be only $100.

How can I lower my credit utilization ratio?

You have three ways to reduce your utilization rate.

1. Purchase less. If you have a low limit, it might seem hard to stay under 30%, let alone 10%. So try charging just a small recurring subscription to the card, like a monthly streaming service. Then set up AutoPay for the full balance, giving you a set-it-and-forget-it way to build your credit score.
2. Pay off more. Paying your full balance each month is ideal. If that’s not possible, pay at least the minimum due, plus enough of your balance to keep the ratio low.
3. Get more credit. This can mean requesting a credit line increase or applying for another card. But be careful, because each new application is a hard inquiry on your credit report, which can also lower your score.

How Credit Utilization Affects Your Scores

Your credit utilization ratio is the second-most important factor affecting your credit score, just slightly behind payment history.

FICO ranks credit utilization as being worth 30% of your credit score, with payment history at 35%. VantageScore calls your credit utilization “highly influential,” while payment history is “extremely influential,” although other VantageScore versions show utilization as being worth 20% of your score.

But in reality, your credit utilization ratio is constantly changing as you make purchases and payments. When you pay off some of your balance, the new lower ratio overrides any higher CUR you may have had a few months ago. So it’s one of the easiest factors in your credit score to correct.

Does credit utilization matter if you pay in full?

Paying in full doesn’t affect your credit utilization unless you do it so early in the billing cycle that the credit bureaus haven’t had a chance to capture activity.

Now, paying off your purchases during your grace period means you’ll likely avoid interest charges. And your positive payment history will help boost your credit score. But depending on when during the month the credit bureaus get a snapshot of your credit accounts, your CUR can look higher or lower.

If you start the month with your balance paid off, and then charge some large purchases to the card, your utilization could be measured at that point. That’s why it’s a good idea to keep operating within the lower ratios, even if you plan to pay everything off at the end of the month.

Having said all that, it’s common for credit utilization ratios to be reported at the end of the month, right before a new statement is generated. But that’s not written in stone, so if you want to be sure, you’ll need to ask the creditor.

Is 0% credit utilization bad?

Having a 0% credit utilization ratio isn’t necessarily bad … but it’s not good, either.

Is it better than maxing out your cards? Absolutely. Is it better than a CUR over 30%? Potentially, yes. But not using your credit cards at all doesn’t help you build a positive credit history, with established on-time payments. And it could cause your creditor to close your card for inactivity, which will lower your available credit. That will increase your utilization ratio if you charge anything at all to your remaining cards.

But wait, there’s more. If you don’t use any credit cards for six months or more, the credit scoring systems won’t generate a credit score for you at all. That makes you “credit invisible,” which puts you on the same playing field as people who are building credit from scratch.

So a CUR in the single digits, between 1% and 9%, is your best scenario. This shows that you’re using your credit — but not too much — and managing it well.

However, let’s clarify a few things here.

1.    If you have several credit cards, it’s OK to keep one or more of them at 0%, because credit utilization is also averaged out over all your revolving credit (called “aggregate utilization”). Individual and aggregate utilization are both important.

2.    Paying off your full balance each month isn’t the same as having a 0% CUR. And it’s one of the best ways to raise your credit score.

Bottom Line

Using less than a third of your revolving credit is a good thing. So is paying off your balance on time, every time, even if you’ve gone over 30% utilization during the month. But if there’s a chance of carrying a balance, always keep your utilization low.

Your ratio is constantly changing, and you can fix it by paying more or purchasing less. But it’s easier to keep the momentum going than to start the ball rolling from a standstill. Once you go too high, it can be hard to get back to where you want to be.

If you decide a new card is the best way to help keep your spending at a reasonable ratio, resist the urge to fill it up. And always see if you pre-qualify before applying so you don’t trigger an unnecessary hard pull.