What’s the Best Credit Card Debt Percentage?

Feb
10
2011

This is one of my favorite topics…the inner workings of credit scoring models.  This time I’m going to address one of the most common questions regarding credit scores, which is what is how does the credit card debt percentage measurement work?  That topic, unfortunately, is also the cause of a great number of credit scoring myths.

First off, what is the debt usage percentage (also known as Revolving Utilization)?  The debt usage percentage is the ratio of your credit card balances to your credit card credit limits, expressed as a percentage.  So, if you have a credit card with a $1,000 credit limit and a $100 balance then you are 10% “utilized” on that card.  You figure it by dividing the balance on the card by the limit on the card…and then multiplying that figure by 100.

Do you know your debt usage percentage? Click here to see your credit report and score.

The debt usage percentage is calculated two ways…aggregate and by each individual card.  The example above is what’s called “line item utilization.”  It’s done on  a card by card basis, as long as the card is still open.  The second way is called “aggregate utilization.”  This is when the debt usage of all of your open credit cards is measured as one  percentage.  So, if you have 10 credit cards each with a $1,000 limit you have $10,000 in aggregate credit limit.  And if you have $1,000 in aggregate balances then your aggregate revolving utilization is 10% ($1,000 divided by $10,000).

Now that we’ve defined the term and learned how to calculate it…let’s address what makes for a good percentage?  The best utilization percentage to have is 0% because then you have no credit card debt and you’re not paying interest.  But, since that’s not realistic for everyone, the best percentage is the lowest percentage you can achieve.  In fact, according to FICO, consumers who have scores above 760 have an average utilization percentage of 7%.

There are reports all over the web that state 30% or 50% are the “target” percentages in order to achieve great scores.  Those are false reports.  In fact, nothing terrific happens at either 30% or 50%.  30% is certainly better than 50% but not as good as 20%.

In general, the lower the percentage the more “points” you’re going to earn in the debt category, which is worth 30% of the points in your FICO scores.  So while 30% is not terrible, it shouldn’t be your strategic target.  And 50% is just an absurd number to shoot for.  I’m not sure where those figures came from but you should not expect great scores carrying that kind of credit card debt.

Pay down your credit cards as much as you can.  There’s nothing good about having a lot of credit card debt.  It’s expensive debt and it wreaks havoc on your FICO scores.  If you can get your debt usage percentage to below 10% your scores will thank you.

Do you know your debt usage percentage? Click here to see your credit report and score.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

Comments

  • Mary
    March 2, 2011

    Do credit scores involve your line item utilization or aggregate utilization? For example, I have a number of credit card accounts open but I don’t really use most of them. I keep them open to keep my credit available. I really use only 1 credit card. I usually have a balance of around $2,500 on a credit card that has credit of about $15,000, so my line item utilization is around 16%. My aggregate utilization is 3% because I have many open accounts not used. Should I be spreading my balance across more credit cards instead of using just one (although that’s far more convenient and allows me to accumulate points).

  • March 3, 2011

    Hello Mary. Yes, both line item and aggregate utilization are calculated and are very important. As for spreading balances, that’s not a good idea. You are penalized for having too many accounts with balances. I bet your scores are very good with 3% utilization. It sounds like you know what you’re doing….so keep doing it!! Thanks for the question. John

  • Charlie
    May 24, 2011

    Thanks for this helpful analysis. My question is this: I am working hard to reduce my credit card debit this year so I can qualify for better rates on a home loan next year. I have debt on two of my three credit cards. Is it still better to be paying of the high interest one first as I have been doing, or should I switch gears to reducing debt on both cards with a balance to lower the utilization on both cards?

    Right now I have about 62% utilization on one, 54% on another and a third at 0%. My aggregate percentage is only about 31% because the zero balance card has a really high credit limit.

    My original plan was to pay off the higher interest one completely and sit on the other because the interest rate is really low, but your article has me second guessing this tactic.

    Thanks.

  • May 24, 2011

    Charlie – If your goal is to attack the debt with the goal of improving your score then you should choose the card that currently has the highest utilization percentage. It doesn’t accelerate the lowering of your aggregate utilization percentage BUT it does bring down the high percentage faster than simply spreading around your extra money. In your case 62% and 54% are so close that neither is likely hurting (or helping) you more than the other. If you had one at 80% and one at 20% I would have advised throwing the extra money at the 80% card. Remember, this is NOT meant to be a strategy to save you the most money. So, keep that in mind please. Good luck!

    John

  • Jimmy
    August 2, 2011

    As I have good credit, the one big question I really want to find out, is whether it is better to pay off my credit card balance PRIOR to the statement date, so that a balance of $0.00/inactive card is reported back to the 3 credit bureaus?

    Or whether it is better to carry a low balance like $1.00 instead, so that a balance of $1.00/active card is reported instead?

    I don’t use a lot of my credit, about $300 out of a total of $10,000, each month. But I am wondering if it is better to pay off $299 BEFORE the current statement date), thus my actual reported balance would just be $1, or pay off $300 BEFORE the current statement date, thus my actual reported balance would just be $0 so it appears like I didn’t use my credit cards at all during the month?

    Thanks.

  • Jimmy
    August 2, 2011

    Just to clarify, I am thinking of paying off all/part of my balance before my statement date, not my due date, so I am not trying to be late on my payments. For example, my statement date is 15th of each month (when I will receive a bill for my balance), and my due date is 22nd of each month (when I will need to pay my bill by or be considered late). So if my balance is $300, I am asking if it is better to pay off $299 before 15th of each month, thus my actual reported balance on 16th of each month is $1 (due on the 22nd), or pay off $300 before 15th of each month, so my actual reported balance on 16th of each month is $0 (so nothing due on the 22nd)? Does that make sense?

    Jimmy.

  • August 3, 2011

    Paying before the statement close date (in full) will keep the balance off of your credit reports because technically you have no balance, which I know sounds silly because you’ve made charges. What you’re asking makes perfect sense but not many people understand the strategy so not many people actually do what you’re doing, which is very smart by the way. Regarding the $1 rollover strategy, I’d skip that. Your scores are probably so good that trying Mickey Mouse stuff like that isn’t really necessary.

  • Amy
    August 7, 2011

    I have a credit card with a balance of $2,400 and a credit limit of $7,000. I have another credit card with a zero balance and a limit of $350. Therefore, my utilization is about 33%. I am looking to buy a house for the first time and have 3,000 saved up for a down payment. Would I be better off using that money to payoff my credit card to get a better credit score? I’ve already been pre-approved for a loan, but my credit score is about 660. Should I payoff my card and then start using the money I would have used for the payments to start saving again, or should I just work on paying the card off after I buy a home?

  • Keshia
    August 16, 2011

    Hello, I recently went to the bank for a car loan and was shocked to see that my credit score is a pathetic 617. After reading up about credit online. I realized that because I only have one credit card which was carrying a balance of a little over 50% of my limit with no other types of loans or accounts reporting, is why I have such unestablished credit. So to help this a raised my credit limit so my carrying balance is now at roughly 32%. I’m hoping to get that loan to create more good payment history. Now my question is geared at raising my score quickly as I’m saving for a home. I live in Canada and have heard that in the States you can piggy back credit from a parent as a co user on their good standing credit cards. Does this hold true in Canada? As well would it help or hurt me to take out another credit card and make small purchases and pay them off monthly in full? Or should I stick to my own credit card account? Which I’m dramatically paying down monthly. Thanks for any input. Keshia

  • Christian
    November 27, 2011

    Thank you for the information, however I’m a bit confused on something. When I took a look at some credit information on Equifax.com they mentioned that it’s not good to have a 0 balance if credit is available to you. I did hear that keeping the balances under 30% is a good idea but now I hear 0% is the best…could you go into a little more detail on why it’s better to maintain a 0% balance?

  • Kelly
    August 19, 2012

    This is not entirely accurate information. I have had a long credit card history and have a lot of experience in the effects that credit card information has on your credit score. I have rarely had a balance to limit ratio lower than 30% since I left college. More specifically, it’s probably been around 45% on average and my credit score is generally 740-760 because it is based on other factors as well. So don’t be alarmed if you have more than a 7% ratio. Make sure your payments are on time, you keep the oldest credit cards minimally active and open and keep the balances under 50% and you’ll be ok. Obviously, the lower the ratio, the better, but no credit is not good either (in regard to your score, history, and future borrowing).

  • August 20, 2012

    Oh yes, I’m quite certain it’s 100% accurate. And with all due respect Kelly, you’re a sample of one while my blog is meant for the masses. I also make it very clear that having 7% utilization is a target, not something you have to do month over month. I even said that 30% isn’t terrible. Regardless, if you want better scores that what you’ve got you can’t have 45% utilization. Finally, are you sure those “740-760s” are actually FICO scores? It’s been my experience that most people who track their scores aren’t actually seeing their real FICO scores.

  • Bill
    August 22, 2012

    Hi John,

    First off I would like to thank you for providing information to everyone, it is extremely helpful! I have a few questions that I was hoping you could address. I currently am employed and have a gross income of $58,500 a year. I have not been very good about keeping my credit card debt down. I have 6 credit cards, 5 of which have high balances (first, balance of $7,000 with a credit limit of $7,000/ second, balance of $6,000 with a credit limit of $6,300/ third, balance of $4,500 with a credit limit of $5,000/ fourth, balance of $1,200 with a credit limit of $1,300/ fifth, balance of $950 with a credit limit of $1,250). The sixth card is a Macy’s credit card that i have used only a few times and the balance is $0. I also have an American Express charge card that I pay in full each month. My aggregate utilization is at just over 94%. Obviously with decent money coming in each month I have a solid plan to pay each down to around an aggregate utilization of 10% in about 8 months. I obviously have just spent way too much money over the past several years!! I have had a few of the cards for 6 years and a few that are more recent (about 2 years), and I have outstanding records for paying each of them (no late or missed payments). Last time I checked which was a few months ago my credit scores ranged from 620-660 (FICO probably on the lower end of that range). My question is: with my plan of paying down the cards to an aggregate utilization of 10% in 8 months, how do you think that will affect my credit scores? Also, if I were to apply for a loan for a home after those 8 months, would they look and see my old high aggregate utilization of 90%+ and would it affect my chances? I have around $30,000 in my 401K at work, does anyone look at that as far as being a positive for credit scores or buying a home in general? Thank you so much for your insights!

  • August 23, 2012

    Taking your aggregate utilization down to <10% from 94% will be huge for your scores. And, there's more good news. At the same time you'll be eliminating some or all of the balances. There's a measurement in FICO that considers how many accounts you have with balances greater than $0. Just DON'T close them when you get them paid off. Leaving them open will help keep your utilization percentage low. Good luck!!

  • Bill
    August 23, 2012

    Thank you, John! If it is around 620 now, what do you estimate it will be when they are under 10% utilized? Also, I’m very interested in knowing if I were to apply for a loan for a home after getting it down to 10% or under, would they look and see my old high aggregate utilization of 90%+ and would it affect my chances? Thanks again!!

  • Marcy
    September 17, 2012

    What is the most amount of points a person can improve their credit score by in 3 months based only on improving their credit to debt ratio? For example if a person had $15,000 in credit card debt and reduced the debt to $10,000? Let’s say their credit score was an even 650.

    Thanks,
    M

  • September 18, 2012

    Hi Marcy – It’s hard to answer that question because nothing happens in a vacuum when it comes to credit scoring. Also, even though you’re lowering your credit card debt by $5,000 in your example, I don’t know what your credit limit is so I don’t know what your new, lower balance-to-limit ratio is. Chances are the score will go up and the amount is dependent on how much you are able to reduce that ratio. Plus, you won’t be paying interest on that $5,000 any longer, which is nice.

  • Marcy
    September 18, 2012

    Thank you. Here is a great question: When your credit score is accessed and analyzed by whomever it may be, do they only look and care about the current score, or do they also look at how high or low the score has been in the past, meaning do they look at how much debt and how careless you may have had in the past?

  • September 20, 2012

    Awesome question. In fact, so good that I’m going to write an article on that topic. The short answer is they only look at the current version because that’s the only version they can get from a credit bureau. Credit bureaus don’t maintain your score over time. But, some creditors will keep your scores “on file” so they’ll know if you’re trending up or down. And yes, there’s value to knowing that info.

  • Jerry Marshall
    October 8, 2012

    General question for John Ulzheimer: I checked my fico score about a month ago and it was 705. I have credit card debt of about $14,000 and a total credit line of about $21,000. I would like to buy a condo (first-time homebuyer) and I have about $10,000 for a down payment , do you think I will have any trouble applying for a loan from the bank with my above numbers? Any information on the above question would be much appreciated.

  • October 9, 2012

    Hi Jerry. Thanks for the question. If that’s the only credit card you’ve got then you’re 66% utilized, which isn’t great. It’s definitely one of the reasons your FICO scores aren’t higher. Here’s what I’d do; go get prequalified from a mortgage broker. You don’t have to get the loan through them but it would be helpful to see what you COULD get with your scores and financials. Keep in mind that mortgage lenders are going to pull all three of your FICO scores and base their offer on the numeric middle score. So, 705 may or may not be the score they use. They may end up telling you that a higher FICO score is required to get a better deal. In that case I’d use some of that $10,000 and pay down your credit card debt, which is likely the most expensive debt you’ve got. Best of luck, John

  • Ann
    October 17, 2012

    Rebuilding credit help : so I need to establish a good great history . I was told to open 3 secured credit cards . Of those 3 cards how much should I spend to rebuild a good credit score ? Score reporting bad 490-540 help !!!!

  • October 18, 2012

    Nothing. Spending money doesn’t help you to rebuild your credit. Having accounts in good standing is what helps. The balance isn’t important and can likely lower your scores. Also, be realistic with your expectations. Scores in the 490-540 range are there because of derogatory credit. Adding some new accounts isn’t going to make a huge difference.

  • Barry
    October 22, 2012

    What do you suggest for someone who doesn’t have any credit history to start building solid credit. No credit cards, no debt, but just got a job for over $40K a year?

  • October 23, 2012

    Congrats on the new job, Barry. If you can get added as an authorized user on a parent’s credit card that will be immediate. If you open a new secured card in your name that will work as well, but it will take 6 months for your new credit report to be score-able.

  • Sam
    November 8, 2012

    John – I wanted to write here briefly to say THANK YOU for this information. For years my wife and I have seen stuff about the whole 30 percent utilization thing. I wonder if some of it is confusion between this issue and debt-to-income ratios. Not sure.

    Anyway, your explanation was very clear and I don’t even need to ask questions. The issue is clear: We need to pay down our credit cards and our FICO scores will improve over time, simple as that. A few of the cards, unfortunately under my name, are basically maxed out at this point. We intend to start focusing our payments on one of those big cards at a time to knock them down.

    We also are in the home-buying research process and hope that by mid-2012 our scores will have improved and we’ll have several thousand dollars saved for a downpayment.

    Thank you again for your wonderful post and I look forward to following this blog from now on!

  • November 9, 2012

    Thanks Sam. Paying down credit card debt and lowering that percentage is the most actionable way to increase your FICO scores because it’s almost immediate, which in the credit reporting world means around 30 days. And yes, I think your theory about 30% coming from the debt-to-income target for mortgage lenders is right on.

    Good luck! John

  • Bill
    December 13, 2012

    John,

    Thank you for the information posted. It helps me a lot to understand the credit issue. My Experian credit score is 730 right now (I don’t know whether this is my FICO score) and I got couple of questions that I hope you could answer if you got time around.

    Q1: Do you know what the ‘revolving line of credit’ is? I had three credit cards for about 1~2 years with ‘normal’ credit limits, $400, $1000, $1700. And I got a new credit card three months ago with unlimited credit! But when I got my statement, it showed that my ‘revolving line of credit’ was $9000! (Huge for graduate student!) I just don’t know whether this will be counted into my aggregated credit limit. (I asked the us bank customer service which provided the credit card, but I know their answers are wrong sometimes.)

    Q2: I saw in other articles that it is better to keep some balance on my credit card account than paying them in full each month, because future borrowers would want to see my ability of carrying debt and paying them in time more than simply just not borrowing money. My debt to credit ratio last month was 10.52%. (But it depends on the question above… if my aggregated credit limit is $3100 instead of $12100, then it will be 41.065%.) And my Experian credit score is 730, which is not considered excellent in these days. I know my credit history is relatively short (~3 yrs) and that is playing bad in my score. But this will be taken cared of in times. But to increase my score up to satisfying level above at least 760, will carrying no balance each month help? Or is carrying zero balance a bad idea for future loan?

    Thank you very much!

  • December 14, 2012

    Hi Bill. Thanks for your questions. A “revolving line of credit” is a fancy way of saying your credit limit. That’s the upper bounds you can charge on that card, just like what you referred to as your “normal” credit limits. Congrats on that large credit limit!! And yes, it will be counted in your agg credit limit, which is good for you. Just use it responsibly please. On to your 2nd question…

    Q2 – Future borrowers care about your credit scores not your ability to carry credit card debt. In fact, there is nothing on your credit report that indicates your past balances or whether or not you have every carried a debt on a credit card. It just shows your balance from your last month’s statement, that’s it. Pay your balance in full each month and you’ll be fine. And, you won’t ever pay interest. Even if you do that it’s very unlikely that you’ll have a utilization percentage of 0%. Credit reports show the balance from your previous statement and it’s rare that your balance is really ever $0, right? When you check clears you’ve already used the card so you already have a new balance that’s greater than $0. If you REALLY want to end up with a $0 balance on your credit report then you have to pay your balance in full by the statement closing date, not by the due date. If you pay it in full by the statement closing date then your statement will have a $0 balance, and that’s what will be reflected on your credit reports. Another way to end up with a $0 balance on a credit report is to not use your card for one full cycle after you’ve paid it off. That way your credit card issuer will report the $0 balance because there are no charges during the month.

  • Addy Rodriguez
    May 3, 2013

    I used to have a very good credit, but dropped about 26 points for the following reason: I had a major credit card that I used for most of my purchases, and kept a balance on it each month; it was the one credit card with the highest credit limit, and my oldest… but that card was closed without my authorization. I called the creditor, and a supervisor said that one of the credit bureaus requested the closing the account, she said that the credit bureau said that “I” had requested it. but I never authorized that to happen. She told me that she would open a dispute with that credit bureau, and that I should receive a letter from them (in about 40 business days) either stating that the report was accurate or inaccurate. I waited, and received nothing. I do not know how to go about it, since I don’t know which one of the 3 business bureaus requested that change. Any advise please?

  • May 6, 2013

    Hi Addy, thank you for your message but I have to tell you that it’s very confusing. The credit bureaus don’t contact credit card issuers requesting the closure of accounts. Re-opening the account should be easy, if the creditor wants to continue to do business with you. Just ask them to re-open the account.

  • May 30, 2013

    You’re doing the right thing and I wish more people would mimic your actions. Paying by the statement closing date ensures that your credit reports never show a balance on your credit cards, which is great. No interest, no credit score issues…excellent.

  • Jay Hughes
    June 7, 2013

    John,

    I have paid down all of my credit cards to zero. However, my two Capital One cards always show a balance of $5 (which is the monthly fee). Do these $5 charges count against my utilization rate?

    I’ve tried to pay more than the balance but it will not allow me. I’ve done this in an effort to truly make it zero (nullifying the $5 charge). Now I only use my Platinum Amex since I accumulate points and I believe it doesn’t count in my revolving credit count since it has no credit limit.

    First, is my Amex belief correct? And two, how do I get around the Capital One $5 charge that looks like a balance on my credit report.

    Lastly, when I run a credit score optimizer on equifax.com when I pay my balances to zero it drops my credit score, however, when I pay it down to 1% utilization my credit score increases from the current number (798).

    One more thing, this is a great page and the information is the best I’ve ever seen.

  • June 10, 2013

    Yes, if that amount is showing up on your credit reports then it will count in your utilization ratio. See if you can pay the balance by the statement closing date rather than trying to pay more than the balance to negate the $5 charge. If they post the monthly fee before the closing date you’ll see it on your online statement and b/c you can make a payment online at any time you can essentially pay it off before your statement closing date. Re, the Amex…it’s very likely that it is counting unless both the credit limit and high balance fields are not populated on your credit reports.

    Yes, it is true that if your utilization ratio is 1% then your score will be slightly higher than if it’s at 0%. But keep in mind that you’re not simulating a FICO score doing what you’re doing so take the results with a grain of salt.

  • Daniel O
    June 10, 2013

    Hi John,

    I really appreciate you busting the 25% credit myth. That has been going around for years and its still be fed to a lot of people.

    My question:
    I have a card with $500 limit and 7% of 500 is $35. My credit close date is 23rd of every month while due date to pay is i think 10th or something. Now, to help build up my credit(low 600s) should i consistently leave a balance of say $30 to report every 23rd of the month and then pay the interest on the $30 before payment date so i can keep that balance.

    Or what would be the good amount to leave to report for close date and when and how much should i pay off? Because i understand it’s better to have a percent higher than 0 reporting every month.

    Thanks

  • June 11, 2013

    If I were you I’d pay it all before the statement closing date. That way your report always shows a $0 balance on that card.

  • Eric Massie
    June 13, 2013

    Hi John,

    Thanks for the great article and advice. Currently, I have a balance of $2500 on a $4,000 credit card, $300 on a $2200 card, and $0 on a $300 store card. I also have two personal loans, one that has a balance of $360 and one that has a balance of $5000. On a side note, I also have an auto loan that is at $21000 and student loans in deferment for $11000. I had planned on paying off the smaller balance on my credit card and personal loan next month, but I’m not sure if I should pay off my installment loan first or tackle my credit card debt. The loan has a notably higher percentage than the credit card, but I’m not sure what the better strategy would be. Any advice would be greatly appreciated, thanks!

  • June 14, 2013

    It’s unusual that a loan has a higher rate than a credit card. Usually it’s just the opposite. It’s really personal preference but I’d knock out the $300 balance on the card and the $360 balance on the loan first. You’ll eliminate 2 accts with a balance which is good for your scores. Then I’d tackle the one with the highest rate and work it down from there.

  • Ryan H
    June 24, 2013

    If you ask your credit card company to either raise your credit limit or lower your APR%, does that count as a inquiry on your credit report?

  • June 25, 2013

    If they pull your credit report in order to make the decision about increasing your credit limit then yes, it does. Some issuers will increase your limits slightly without pulling credit. In those cases, no.

  • Ryan H
    June 25, 2013

    Thanks for the reply! One of my cards has a balance of $4,500 with a credit limit of $6,300 and an annual APR of 24.99%. I received an offer from the same company for a credit card with 0% APR on balance transfers and purchases for 18 months. I am trying to 1. Improve my credit utilization rate and 2. Pay off my credit card debt. Both of these things will obviously improve my score to help purchase home down the line. My question is should I apply for this new card and transfer the existing balance to it (this way I don’t pay interest on that balance and I have a higher total credit line to help improve my utilization rate), or just keep paying off the old card and hope the issuer increases my credit line on that card? Either way I won’t use either card for purchases. I know my credit might take a hit with applying for the new card but I save money with paying no interest and get a higher total credit limit. What’s the smart thing to do here?

  • Ryan H
    June 27, 2013

    John?

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