Forget the 30 percent credit utilization 'rule' – it's a myth

Your score won't fall off a cliff at 31 percent or soar at 29


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Question Dear Speaking of Credit,
My questions are about the 30 percent credit utilization rule. I keep reading elsewhere that you have to keep your credit use below 30 percent of available credit if you want a good score. I guess my main question is, is it really a rule at all? At 29 percent credit utilization, my credit score is fine, but if I hit 30, boom! It falls off a cliff? Or is it just a sliding scale, with 70 percent utilization terrible, 50 percent bad, 30 percent OK, 10 percent really good and 0 percent best? – SuziT


Dear SuziT,
This is a great question that touches on one of my all-time credit scoring pet peeves. Having become familiar with many of the inner workings of the FICO scoring formula over the years, I can tell you that a credit utilization percentage “threshold” is more like the sliding scale you describe than a hard-and-fast rule where, as you say, being one point over the magic number sends your score off a cliff.

With credit scoring, it’s important to understand that mathematical calculations, based on data reflecting the experiences of millions of consumers and designed to predict future credit risk, don’t necessarily result in easy-to-remember numbers, like 30 or 50 percent, that can be applied universally. The way it works in practice, since there’s not much additional predictive value to assigning different numbers of points at every single percentage point along the 0-100 percent spectrum, is that the scoring formula assigns points according to ranges of percentages. The lower the percentage range, the more points awarded. This is why there’s no “boom” when your utilization hits 30 percent, unless in doing so your utilization percentage has moved to new range that offers few points.

There are additional reasons why a single one-size-fits-all utilization percentage cut-off cannot realistically apply to credit scoring and why that’s OK:

  • A particular utilization range may have points assigned differently for individual cards than for combined account percentages. For example, your score might change when utilization on an individual card reaches a certain percentage range, yet it might not change when the average of all your cards combined hits that same percentage or range.
  • Utilization ranges and points that apply to one person’s credit experience may not necessarily apply to a different set of experiences. That’s due to the "multiple score card" system, by which credit scores use different scoring factors and different weighting of the factors for different sets of credit experiences. Furthermore, the same set of utilization measures might not always apply in the same way to the same person, as the indicators of credit experience, such as length of credit history, number of accounts, payment history, etc., change over time.
  • Whether talking about utilization or any other set of credit scoring factors, we should never expect to see actual numbers, such as 30 percent, since this level of detail would only be meaningful when actually calculating scores, which, of course, requires much more information and analytical ability than any nonmathematician without access to credit bureau data and proprietary scoring formulas can be expected to have.

The closest we can come to a rule that applies universally to utilization percentages, whether considering a single card or all cards combined, is: The lower your credit utilization is, the better – but it’s better to have something (a percentage higher than 0) than nothing.

Why higher than 0 percent? Going back to the idea that the percentage ranges are based on research into the behavior of millions of consumers, it turns out that the risk of default has actually been found to be a little higher at 0 percent utilization than at slightly higher-than-0 percentages. The main reason for this odd occurrence is that a $0 balance – which leads to 0 percent utilization – is often the result of not using credit regularly, which research has shown to indicate higher future risk. That’s right, not being in debt makes you a higher risk. Go figure.

This is not to say, however, that there isn’t some value in the oversimplified mantra of keeping utilization under 30 percent, although, to be more consistent with the actual workings of the score, I recommend 25 percent as this threshold.

Just as it’s a good diet motivator to set some challenging-but-achievable weight benchmarks and adjust them as you go until you arrive at the ultimate goal, the same methodology for reducing your credit utilization can also work to your advantage. For example, if you’re maxed out on your cards and can’t pay them off right away, first shoot for 75 percent, then try for 50 percent, and so on, until your utilization drops down into the single digits.

Lastly, anytime we talk about on the complexity of credit scoring, it’s also helpful to remind ourselves that while the scoring formula is indeed a complicated set of mathematical calculations, achieving a good score boils down to following a simple and common-sensical set of three rules:

1. Pay on time.
2. Keep card debt low.
3. Apply for new credit only when needed.

And for good measure I’ll add a fourth rule, since we’re talking about credit utilization: Lower is better, and something is better than nothing.

Hope this helps. Thanks for writing!

See related: Charge a lot? Pay early and often to avoid score damage, How card companies report utilization to credit bureausKeep your score high while using your card

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