What’s the Best Credit Card Debt Percentage?

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.

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