Should Your Utilization Ratio Be Zero Percent?

Should Your Utilization Ratio Be Zero Percent

Your credit utilization ratio comes with one basic rule: the lower it is, the better it is. Naturally, this can convince some people to shoot for zero percent, the lowest possible ratio you can achieve. But does this utilization ratio help your credit score? It might not be worth the trouble.

What is Your Credit Utilization Ratio?

Your ratio shows how much you use on an open line of credit or credit card and expresses it as a percentage. Since this ratio only applies to revolving accounts, your outstanding debt from personal loans and mortgages will not count.

Why is that? It has to do with the way revolving accounts work.

When life throws you a curveball, you don’t always have the cash available to handle the unexpected. Taking out a line of credit can help you get access to cash that you can use to pay unanticipated medical expenses or repairs on a revolving basis.

Its revolving nature is important. It means you can make draws against your line of credit limit, pay off your balance, and redraw up to your limit again without reapplying.

Because your balance can fluctuate depending on your usage, credit bureaus may check the ratio on these accounts. Your ratio is a good indicator of how well you manage your debt, so it may factor into your creditworthiness.

How to Calculate Your Ratio?

You can find out your ratio with simple math. All you have to do is divide your current outstanding balance by the limit of your account. You can convert this number into a percentage by multiplying it by 100.

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The equation above teaches you how to figure out the ratio of an individual account. You can apply the same idea to find out the overall ratio of all your revolving counts.

To do so, you must add up all the outstanding balances of your revolving account, remembering to keep your personal loans out of this sum. Next, add up the limits of these accounts. Now you can divide the total balance by the total limit, multiplying it by 100, and you have your total ratio.

What is a Good Utilization Ratio?

If you’ve googled the topic before, you may have come across the 30% rule. It states you should never use more than 30% of your limits at any time. That’s because anything over 30% may negatively impact your score.

It’s important to note that the 30% rule is a maximum threshold rather than a target. Most financial advisors recommend keeping your ratio much lower.

Should You Keep Your Utilization Ratio at 0%?

While less is better, zero may not have the effect you expect. That’s according to Experian, one of the three major credit bureaus in the States.

Experian doesn’t recommend 0% for a few reasons:

  1. A 0% ratio is another way to say you don’t use your revolving accounts. This means a bureau like Experian can’t glean any information about your borrowing habits from these accounts.
  2. An unused account won’t contribute to your payment history, the biggest factor of your score.
  3. A lender may close an account that is inactive long-term. Closing account may momentarily affect your score and leave you without this safety net.

So, where does that leave you? Experian looks to data collected from people with the best scores. Those with FICO scores above 800 tend to keep their ratios between 1 and 10%. A single-digit ratio establishes usage in a responsible way.


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