Credit Card Utilization Technique

One of my favorite sites talks about how to handle credit card utilization Credit Karma

What is credit card utilization?

It's the amount you've used on your credit card and is calculated based on your total available credit. Example let's say you've got a $1000 dollar limit and your balance is $500 dollars your utilized percent would be 50%. 

Formula    (card balance amount/ Total available credit) x100  

example $500 / $1000 * 100 = 50%

Source: Credit Karma

Every credit score improvement article suggests that consumers should not have a high credit card utilization rate. (Defined as: total credit card balances / total credit card limits). Often the recommendation is the lower the credit card utilization rate, the better the credit score. Experts also suggest that the credit card utilization rate should never exceed 35%.

I actually try to keep the credit card utilization down lower like around 10-17%, my experience has shown my scores to be better when you do this. I've also seen lower scores because your balance is $0.00 and you don't utilize your card at all.

FINDINGS

The data and chart do suggest there is strong correlation between a consumer’s credit card utilization rate and their credit score. The lower the credit card utilization, the better the credit score generally speaking.

There is one exception in this recommendation. At credit card utilization rate of 0%, the average credit score for this group is actually much lower than at the 1-10% (742 vs. 667). People with 0% credit card utilization could fall into 2 categories.

• 1) They don’t have a credit card because they have poor credit. Having a credit card and different types of credit help demonstrate credit worthiness in the eyes of lenders and credit scoring algorithms.
• 2) They don’t use their credit cards at all. This is the reason why credit score tips usually suggest you use your credit card every couple months if only on small purchase to show an active credit profile with positive payment history.

With the results in mind, it would be unproductive to suggest not carrying a balance at all since this is a primary benefit of credit cards. The reality is that many consumers need the convenience of revolving debt from credit cards. Keeping this mind, we suggest keeping your balance lower than 35% on all your credit cards and making sure you pay on time and the debt is something you can manage.

It is important to understand that card utilization is not the only thing that determines your score it's just all part of the process of scoring your credit worthiness.

But if you already have good scores and you want to make them better then you should spend on your cards even if it's a few dollars every month and pay when your bill comes in. Don't over due it but just keeping it between 5% - 17% is what will build your credit because your showing that you can handle your credit cards.

All images are copyright to creditkarma.com and respectable third parties.