Here's an axiom familiar to borrowers: Using too much of your
available credit hurts your credit score. A personal finance rule
of thumb that goes with it says that for a good credit score, keep
credit utilization ratio
" -- what you use versus how much you have to use -- below 30
percent. The rule applies to each card individually, and to the
cumulative limits of all your cards.
So if you have a card line with a $10,000 limit, for the best
credit score, don't carry a balance higher than $3,000. Simple,
Sorry, but no. Your credit limit has fewer hard-and-fast rules
than personal finance bromides would have you think. Knowing its
tricks can get you a better credit score and keep money in your
Forget the old 30% idea
Start by throwing out the old notion about 30 percent usage being
OK. FICO, the company that originated credit scoring and is still
the largest provider of such scores, has long advised
score-conscious consumers to be far more stingy about credit use.
The company had told people to keep it to 10 percent or less, says
Anthony Sprauve, spokesman for myFico.com, FICO's consumer
More recently, the company's stance has softened he says. Its
studies indicate that there is only a minimal score difference
between consumers who limit their usage to less than 20 percent and
those who keep it to less than 10 percent, he says.
That can be good news for consumers who want to actually use
lower-limit credit cards for more than token purchases.
According to FICO surveys, credit scoring "high achievers --
those with a score north of 750 -- they're using an average of 7
percent of their available credit," Sprauve says. "I think 20
percent, for a lot of people, is more realistic. I would rather
talk about that as a realistic goal that they can attain, rather
than something that might feel like a stretch and out of
And remember that credit scoring formulas are closer to a
sliding scale than a cliff. You don't go from a great score at 20
percent credit utilization to a lousy one at 21 percent. "There's
no hard-and-fast guideline," Sprauve says. "But I think that if
people stay somewhere between 10 and 20 percent range, that's a
good place to be."
It's still true that you shouldn't go rack up debt on any one
card. The FICO scoring system looks at "the total available credit
and the total balance used," says Sprauve. "But it also does look
at individual lines of credit. So it factors in both."
FICO, VantageScore differences
FICO's chief alternative, the
, is a bit more lenient in how it views utilization ratios. FICO
counts credit usage as 30 percent of its overall score. In the
VantageScore universe, the ratio makes up about 23 percent of the
score, says Sarah Davies, senior vice president of research and
analytics for VantageScore Solutions.
To keep it strong, aim for using less than half of your
available credit lines, says Davies.
"If you keep your balance below 50 percent, your score is not
negatively affected," she says. And keeping it "below 30 percent"
is smart, she adds. And, as with the FICO models, the lower your
utilization (above 0), the more benefit your score can see, she
says. Also, as with FICO, how much a change in the utilization rate
affects the score will vary by person, depending on their
individual credit history.
If you like VantageScore's attitude toward credit usage better,
that's nice, but you don't get to pick which score lenders use.
VantageScore is used by less than 10 percent of the lending market,
says Craig Focardi, research director for the TowerGroup.
Maximizing your credit score
Want to keep that score as high as possible while still using your
cards? Here are four ways:
1. Use a card that doesn't report utilization
(cards where the full balance is due every month) don't report
card balances to the credit bureaus. The best way to find out if
yours does: Call the card issuer, says Sprauve. And if your card
doesn't report monthly card charges, you don't have to worry that
using more of your credit line will affect your score, he
2. Time your payment.
You can appear to be carrying a balance, even if you're not.
That's because card issuers report your balance owed to the
credit bureaus on the same day every month, says Norm Magnuson,
vice president of public affairs for the Consumer Data Industry
Association, a trade association for credit reporting companies.
That day probably isn't your payment due date.
Think of it as a monthly snapshot of your credit use. You want
to look as pretty as possible to the credit bureaus on that day.
If you're carrying a $2,000 balance on the 10th of the month,
when the snapshot is taken, it doesn't matter if you pay it off
on the due date on the 15th. The report to the credit bureau will
say you were using a chunk of your credit, and that may blemish
The solution: Find out what that day is, and pay any portion
over your target usage amount before then. Phone the issuer and
ask, "When do you send down that accounts receivable tape to the
credit bureau?" says Magnuson. "I don't see why they'd have a
problem with answering that. It's a straightforward
3. Pay your bill several times a month.
Want to make certain you're always under your usage goal while
still getting the most out of your cards? Try making
payments weekly or twice a month
. That will always suppress your balance, no matter when the
credit bureau snapshot is taken.
But be careful: If you pay before the statement date, it could
be counted as part of a different billing cycle, says Paul
Westen, president and CEO of TCM Bank, the card issuer for many
community and independent banks. You could still have a bill due
in a few weeks, he says.
The smart move: Call first and find out how the billing
department handles multiple monthly payments, along with what
information you need to include when you pay.
4. Request a credit line increase.
If you use a set amount every month and want that amount to equal
10 or 20 percent of your credit line, one way to make the math
work is to increase the credit line, says Westen. "Creditors no
longer give automatic credit line increases," he says. Instead,
the onus is on the consumer to ask for more credit.
Utilization ratios aside, if you're paying that balance on time
and in full "every month for a period of time, most issuers will
have you at the most attractive rate," says Westen. If they don't,
then switch cards, he advises.
FICO credit score's 5 factors
How FICO looks at your credit use
Good payment record no longer wins automatic credit