To maintain a healthy credit score, it's important to keep your credit utilization rate(CUR) low. The general rule of thumb has been that you don't want your CUR to exceed 30%, but increasingly financial experts are recommending that you don't want to goabove 10% if you really want an excellent credit score.
But what would happen if you have 0% utilization rate? To the credit card issuers, it may not look as good as you think.
"For credit cards, it's important to 'use but not abuse' those cards," Jim Droske, president of the credit counseling company Illinois Credit Services (and someone with a perfect credit score), tells Select. The key is to feel comfortable putting everyday expenses on your card with the knowledge you can pay off the bill at the end of the month.
Below, we take a look at how to calculate your credit utilization rate and why keeping yours at 0% may reflect negatively on your credit score.
How to calculate your credit utilization rate
Your credit utilization rate (also known as your credit utilization ratio or debt-to-credit ratio) measures how much credit you are using compared to how much you have available. The calculation looks at both your credit card balance and your credit card limit.
For example, if your current balance is $2,000 and you have a $5,000 limit, that makes your credit utilization rate 40%.
($2,000 / $5,000 = 0.4 X 100 = 40%)
"It's not the dollar amount owed that's important, it's the percentage," Droske says. "So, a $500 balance on a $10,000 credit limit is a 5% ratio, but the same $500 balance on a $1,000 limit is 50%."
Why you shouldn't go as low as a 0% credit utilization rate
If your CUR is 0%, it shows lenders and credit card issuers that you aren't making any purchases on your credit card. Remember, it's important to use your card.
"When a credit card account is reported with a zero balance, some scoring models will look at a zero balance as if the card is not being used," Droske says. "Maybe it's in your drawer at home, or, for whatever reason, you aren't using it at that point. Not using it at all is not as good as using it in very small, controlled ways."
While a 0% utilization is certainly better than having a high CUR, it's not as good as something in the single digits. Depending on the scoring model used, some experts recommend aiming to keep your credit utilization rate at 10% (or below) as a healthy goal to get the best credit score.
How to lower your credit utilization rate and get a higher credit score
It's important to make your CUR as low as it can be, without hitting 0%. This will help you get a good credit score, which will in turn help you qualify for the best rewards credit cards.
To improve your CUR, work on paying down your existing balances before doing anything else. If you already have a good credit score but are still struggling to pay off credit card debt, consider getting a balance transfer credit card. Balance transfer cards offer temporary interest-free periods so you can just make payments toward your principal balance without worrying about accruing interest.
If you want to maximize no-interest periods, consider the Citi Simplicity® Card with a 0% intro APR for 21 months on balance transfers from date of first transfer (after, 19.24% - 29.99% variable APR; balance transfers must be completed within four months of account opening). There is an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).
Once you paid down at least some of your balance, it may make sense to then ask for a credit limit increase, as long as you're confident you won't overspend with a higher credit limit.
How to maintain a low credit utilization rate
Already have a low utilization percentage? Make sure you continue to never charge more than you can pay off. "Don't treat credit cards as a long-term loan," Droske says. "Consider it a short-term loan and a convenient way to pay for things."
And lastly, avoid closing any of your credit cards — especially your oldest one. Closing credit cards often has an immediate negative impact on your utilization percentage (and your credit score) as your credit limit will go down.
"Low balances and high credit limits are the recipe for low utilization," Droske says.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
While a 0% utilization is certainly better than having a high CUR, it's not as good as something in the single digits. Depending on the scoring model used, some experts recommend aiming to keep your credit utilization rate at 10% (or below) as a healthy goal to get the best credit score.
Is a 0 balance good for credit score? ›
Generally, a zero balance can help your credit score if you're consistently using your credit card and paying off the statement balance, at least, in full every month. Lenders see somebody who is using their credit cards responsibly, which means actually charging things to it and then paying for those purchases.
Does keeping a small balance help your credit score? ›
In general, it's always better to pay your credit card bill in full rather than carrying a balance. There's no meaningful benefit to your credit score to carry a balance of any size. With that in mind, it's suggested to keep your balances below 30% of your overall credit limit.
Will having no debt increase my credit score? ›
Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio. While in some cases your credit scores may dip slightly from paying off debt, that doesn't mean you should ever ignore what you owe.
Do you build credit from 0? ›
How long does it take to build credit from 0? It generally takes three to six months to get your first credit score, although the time it takes to build good credit is different for everyone. It depends on factors like what your credit scores are now, how you're managing debt and more.
Is it better to have no balance or a low balance on a credit card? ›
Your balance relative to your credit limit on each card, or credit utilization ratio, can hurt your credit score if it is too high. Generally, maintain a credit utilization ratio under 30%, and lower is better, Richardson says.
How to get 800 credit score? ›
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
Is it bad to max out a credit card and pay it off immediately? ›
While paying off a maxed-out Credit Card is possible, it often comes with adverse consequences such as high-interest charges, damage to your Credit Score, and financial stress.
How can I raise my credit score 200 points in 30 days? ›
Try paying debts and maintaining your credit utilisation ratio of 30% or below. There are two ways through which you can pay off your debts, which are as follows: Start paying off older accounts from lowest to highest outstanding balances. Start paying off based on the highest to lowest rate of interest.
Does paying off a credit card immediately improve credit score? ›
Consistently paying off your credit card on time every month is one step toward improving your credit scores. However, credit scores are calculated at different times, so if your score is calculated on a day you have a high balance, this could affect your score even if you pay off the balance in full the next day.
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
How can I raise my credit score 100 points overnight? ›
10 Ways to Boost Your Credit Score
- Review Your Credit Report. ...
- Pay Your Bills on Time. ...
- Ask for Late Payment Forgiveness. ...
- Keep Credit Card Balances Low. ...
- Keep Old Credit Cards Active. ...
- Become an Authorized User. ...
- Consider a Credit Builder Loan. ...
- Take Out a Secured Credit Card.
Why credit scores can drop after paying off a loan. Credit scores are calculated using a specific formula and indicate how likely you are to pay back a loan on time. But while paying off debt is a good thing, it may lower your credit score if it changes your credit mix, credit utilization or average account age.
How long will it take to get a 700 credit score from 0? ›
Starting with zero credit history, you can establish credit in as little as six months. Achieving a "good" credit score of 700 or better usually requires making timely payments for at least 18 months to two years, but it's possible to find shortcuts.
How can I raise my credit score fast? ›
- Pay credit card balances strategically.
- Ask for higher credit limits.
- Become an authorized user.
- Pay bills on time.
- Dispute credit report errors.
- Deal with collections accounts.
- Use a secured credit card.
- Get credit for rent and utility payments.
How soon can you see improvement? The length of time it will take to improve your credit scores depends on your unique financial situation. At the earliest, you may see a change between 30 and 45 days after you have taken steps to positively impact your credit reports.
What does it mean if my credit balance is 0? ›
If you completely pay off your statement balance by the due date each month, your balance will be zero.
What does 0 credit balance mean? ›
What Is a Zero Balance Card? The term “zero balance card” refers to a credit card with no outstanding balance of debt. Credit card users can maintain zero balance cards either by paying off their full balances at the end of each billing cycle, or by simply not using their cards.
Is closing a credit card with zero balance bad? ›
Your credit utilization ratio goes up
By closing a credit card account with zero balance, you're removing all of that card's available balance from the ratio, in turn, increasing your utilization percentage. The higher your balance-to-limit ratio, the more it can hurt your credit.
What is the best balance for credit score? ›
While many credit experts recommend keeping your credit utilization ratio below 30% to avoid a significant dip in your credit score, the 30% rule should be considered the maximum limit, not your ultimate goal.
