What Is The 30% Credit Utilization Limit About?

What Is The 30% Credit Utilization Limit About

The very idea of a credit utilization rate limit may seem strange to some. After all, why would a lender give you a certain limit and then try to punish you when you use it? Why does it count so heavily in calculating your credit score in the first place?

Reasons Why Credit Utilization Matters

Well, think about it:

  • From the lender’s perspective, someone who is always at or near their credit limit is not using their credit as responsibly as they should.
  • The fact that you are still using more borrowed money indicates to the lender that you don’t have the money to pay down your debts and that makes them nervous.
  • The more debt someone is carrying, the higher the likelihood that they won’t be able to repay all of it.

That is why the credit utilization rate factors so heavily in your credit score calculation.

Why the “30 Percent Rule” is a Myth

We have all heard the axiom that keeping your credit utilization rate below 30 percent is essential for achieving and maintaining a credit score that is always either good or excellent. However, there are many reasons why that mysterious 30 percent figure is a great guideline, but it’s not a hard and fast rule.

Put simply, while keeping your credit utilization rate as low as possible is always a good idea, the idea that going above that threshold will sink your credit score is merely a myth. You are not fine at 29 percent and in really bad shape if you’re at 31 percent.

There Can Be No Hard and Fast Rule For Credit Utilization

When it comes to credit scoring, one size doesn’t fit all. Keep in mind: the mathematical calculations are based on the experiences of millions of consumers as a way to assess their potential credit risk. That means the numbers are continually changing, and they don’t usually result in numbers that make it easy to predict the effect of any action on your credit score.

The way the credit utilization rates works are in combination with all other factors taken into account to compile a credit score. The lower the percentage range, the more points are added to your credit score, but the rate is calculated as a range, not as a specific score.

The Problem
If you have $50,000 of available credit, but you are always carrying a balance of $45,000, it indicates that you are relying on credit to a greater degree than on your income. That makes creditors and other lenders very nervous.

Impact of Credit Utilization on How Credit Scores are Calculated

When a credit rating agency like FICO considers credit utilization, they look at ranges, which are based on the other four factors in your credit score. That means the lower the percentage range – the more points are assigned to your score, for the reasons mentioned in the list above. Since the ranges are based on you and your credit use, there can be no “30 percent cliff.” When your credit utilization moves either up or down to a different range, your credit score will be adjusted accordingly.

The best practice is to keep your credit utilization rate as low as possible. Different points may be assigned to one individual credit account than are assigned to all of your credit accounts. For instance, if your overall credit accounts have a 20 percent utilization rate, but one of them is always sitting at 75 percent or above, you may see a drop in credit score.

Why 15 Percent is Better Than Zero

According to a survey conducted by Credit Karma in 2014, those users whose credit utilization rate was between one percent and 10 percent had a much higher credit score than those whose rate was at zero percent.

The difference was significant; about 60 points. Research has suggested that people who don’t use credit regularly tend to be a higher risk than those who use it regularly. So, the bottom line is, taking out a loan can be good for your credit score, but only in moderation.


1 Bank for International Settlements “Principles for the Management of Credit Risk” https://www.bis.org/publ/bcbs75.htm
2 Nerdwallet “30% Credit Utilization Rule: Truth or Myth?” https://www.nerdwallet.com/blog/finance/30-percent-credit-utilization-ratio-rule/
3 Experian “What is a Credit Utilization Rate” https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/

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