Credit Utilization and Your Credit Score

One of my favorite things about credit cards is that I get 30 days to make a payment after my statement becomes available.  I love waiting 25 days to pay – not because I don’t have the money, but because I consider it a 25 day interest free loan. Instead of paying immediately, the money sits in my savings account and earns interest.  I am fully aware that the interest I am earning is pretty insignificant (we are talking a few dollars over the course of a year), but its free money and it makes me happy.

The only drawback to doing this is that my credit utilization rate will be higher, and if that rate is too high it can affect my credit score.  A credit utilization rate is simply the ratio of money owed vs. available credit.  Here’s an example:  Lets say I spend about $1,000 a month on my credit card which has a credit limit of $8,000.  At the end of May I will have a balance of  $1,000.    If I pay my statement immediately, I will start June with a $0 balance.  The largest balance I will ever have on my card is $1,000, meaning at most I will be using 12.5% (1,000/8,000) of my credit limit.  (Credit utilization rate is 12.5%)  If, however, I wait 30 days to pay off my statement, I will start June with a $1,000 balance and by the end of June my balance will be close to $2,000.  My payment of $1,000 for May’s statement at the end of June will be on time, but at the end of every month I will be using 25% (2,000/8,000) of my credit limit.  (Credit utilization rate is 25%)  I wasn’t sure how much was too much in terms of credit utilization so I did a little research.

How does credit utilization affect my credit score?  As most people will correctly tell you, the number one rule of establishing a good credit score is to make your payments on time.  Unfortunately, paying your bills on time accounts for only 35% of your credit score.  According to most sources (including the Consumer Federation of America, and credit scores are comprised of five basic categories:

  • Payment history (35%)
  • Money owed vs. available credit (30%)
  • Length of credit history (15%)
  • Recent credit applications (10%)
  • Mix of credit types and other factors (10%)
The second most important category is money owed vs. available credit, or credit utilization.   According to most financial experts, the lower your credit utilization the better.  The following chart from Credit Karma is an excellent depiction of this trend and is the best explanation I could find on what is the most advantageous credit utilization percent.  As you can see from the graphic, your best bet is to use less than 10% of your credit limit.  It is important not to infer that credit utilization is the only driver for credit scores.  Check out the original article for more details.

Should I be measuring credit utilization for each card or for total available credit?   I have one other card with a $4,000 credit limit that I rarely ever use (because I don’t get cash back).  If I use that card in my calculations, my total credit limit is $12,000.  At most I will have a 16.6% (2,000/12,000) credit utilization rate, which sounds much better than a 25% utilization rate.  So which is it?

According to this article from, “the [credit score] scoring formula also looks at utilization on the individual cards that make up the overall utilization percentage.”  So while the most important thing is to keep your total credit utilization rate below 30%, you should also not ignore high utilization rates on each of your cards.  By spreading around your spending on multiple cards, you can also avoid having your unused card have an unexpected credit limit decrease.  So for now, it looks like I’ll start paying my bills sooner until I can get a credit limit increase…