There’s a lot of myths and misconceptions in the credit universe (See our recent blog on charge-offs and collections), and we’re always here to help quash the controversy. Today’s misconception we’d like to address: The oft-cited “30% Rule” of credit utilization.
If you’re trying to get the best terms on a mortgage, you may have been told to follow the 30% Rule- that is, you should always make sure to keep your credit utilization below 30% of your overall credit limit. What’s true is that you should always keep your credit usage low on any revolving accounts. What isn’t is that your credit profile would be unscathed at 25%, or even 10% of your limit.
Yep, you heard right- any credit utilization ratio above 5% could have a harmful effect on your credit. Of course, how much your score could drop depends on other variables such as how long the account has been open, or activity on other accounts. Credit scoring models place consumers into different scorecards based on individual credit experiences. The scorecard you’re on will weigh certain credit activity differently, and thus, your score might be impacted differently.
Plus, each percent increase over 5% won’t necessarily result in a linear score drop, either. However, once you hit 30%, your score could decrease even more rapidly.
Remember, your credit utilization accounts for about 30% of your score, so although it’s not the end-all, it accounts for a sizeable chunk.
As a general rule of thumb, it’s best practice to keep your credit utilization as close to 0% as possible, without actually hitting 0%. The reason for this is that having a $0 balance on your credit card may give the scoring system reason to believe you aren’t using your credit regularly, so you may be considered a higher risk. In other words, if you’re using your debt but managing it responsibly, you’ll be in better shape than if you’re not using it at all.
Calculating your credit score is complicated, but practicing good credit isn’t. As long as you 1.) pay your bills on time, 2.) apply for credit only when necessary, and 3.) keep your debt low, your score will take care of itself. And remember- in terms of credit utilization, something is better than nothing.