What Is the Credit Utilization Rule of Thumb?

The credit utilization rule of thumb states that consumers should aim to use 30% or less of their available credit to maintain a healthy credit score. But some experts say that’s an arbitrary number and that it’s best to keep your balances as close to zero as possible. 

Read on to find out if the 30% credit utilization rule of thumb holds water and what you need to do to truly optimize your credit score.

What Is the Credit Utilization Rule of Thumb?

Credit utilization refers to how much of your available credit is being used. It’s the second-most important factor for the most popular credit scoring models (right behind payment history) and accounts for 30% of your score. That said, the credit utilization rule of thumb you may have heard is that you should aim to stay below 30% utilization to maintain a healthy credit score. But that’s not the whole story.

“There’s nothing magical or specific about 30%,” said Barry Paperno, a retired credit expert who spent 40-plus years in the industry, including with FICO and Experian. “The way the scoring models work is the lower you go [with utilization], the more points you get.”

Consumers should think of 30% as more of a caution sign rather than a concrete rule of thumb. If your utilization ratio is heading north of 30%, it’s time to put on the brakes and get it down. “It’s safe to say that you can still have a very good score with a 30% utilization rate—you could have a score over 700,” said Paperno, assuming you pay on time and do everything else right. But if you’re striving for the best possible credit score, a better rule of thumb is to stay as close to 0% as possible.

Where Does the Credit Utilization Rule of Thumb Come From?

Paperno thinks the 30% recommendation was born when personal finance reporters asked experts to give a threshold that consumers could look to. “I’ve been doing these interviews for years, and everybody wants specifics,” Paperno said. Experts began recommending that people aim to stay below 50% but would then be asked, “How much below 50%?” Paperno explained. That’s when experts started saying 30% was a safe bet. 

“So the true answer is: The lower the better. But the 30% really came from reporters wanting something specific,” he said. 

How to Calculate Your Credit Utilization Ratio

Calculating your credit utilization ratio is simple: Divide the balance you owe by your total credit limit, then multiply by 100. If you have a $1,000 limit and are carrying a $200 balance, the calculation would be:

200 / 1,000 = 0.2

0.2 x 100 = 20%

Why the 30% Rule of Thumb Should Be Lower

If 30% isn’t ideal, then what is? “In defense of the 30% rule of thumb, it does help to have some kind of a goal,” Paperno said. And 30% is a safe place to start.

But ultimately, the ideal place to be is in the 1% to 10% utilization range, Paperno said. “You’re not really in the clear until you’re in that world in terms of maximizing the number of [credit score] points you’re going to get.”

In fact, for people with the best credit scores—dubbed “high achievers” in a 2020 study by FICO—the magic number seems to be 10%. FICO’s study revealed that people with scores between 750 and 799 had an average utilization ratio of 10%; for those with an 800-plus score, the average rate was 4%.

How to Lower Your Credit Utilization Ratio

If you’re teetering on the edge of 30% or want to take a more proactive approach to lowering your ratio—and improving your credit score in the process—try one of these strategies:

• Pay off your balances: This is the best approach, if you can swing it, Paperno said. By knocking off a chunk of what you owe, you’ll lower your ratio and reduce your debt burden—a win-win. 
• Spend less on credit: Give yourself a cutoff amount and set up an alert that lets you know when you’re approaching it. For instance, if you have a $1,000 limit, you might set up a notification if your balance goes over $100.
• Increase your limit: Because credit utilization is a ratio, if you increase your credit limit without changing the amount you owe, your ratio will still decrease. For example, if you owe $500 and increase your limit from $2,000 to $2,500, your ratio will go from 25% to 20%. You can contact your issuer to request a credit limit increase.
• Get an additional card: If you open a new credit card, you’ll increase your overall available credit. But you’ll also incur a hard inquiry and lower your average length of credit history—both of which can have a negative effect on your score, Paperno warned. That said, if there are other benefits to opening a new card, go for it. Just don’t be tempted to spend more, or you’ll quickly undo any utilization progress.
• Keep old cards open: One reason experts recommend that you don’t close old credit cards is that doing so lowers your total amount of available credit, which in turn increases your utilization ratio.

Grain of Salt

You may go over 30% credit utilization if you make a large purchase and don’t pay it off before that balance is reported to the credit bureaus. It’s not the end of the world, since credit scores and debt are meant to fluctuate. Once you pay the bill, your utilization ratio will go back down and the change will be reflected in your score the next month (all other things being equal). 

The goal is to keep your utilization on the lower side most of the time, especially if you plan to apply for a home loan or some other line of credit in the near future. During such transactions, a small point drop in your credit score can have real-life consequences.