Credit (Definition) Check: What Does Credit Card Utilization Rate Mean?

When going over your credit report, you should pay attention to a key factor that could impact your score: your credit card utilization rate. Whether you just received your first credit card or want to improve your credit history, understanding how using your credit card will affect your credit worthiness is crucial to maintain a healthy score.

How Credit Card Utilization Rate is Calculated
A credit card utilization rate ranges from 0 percent to more than 100 percent. The higher the utilization rate, the higher the balance there is on your card. In calculating this factor in your credit score, credit reporting companies will divide your current credit card balance by the credit limit and multiply by 100. For example, if you have a credit card balance of $3,000 with a credit limit of $5,000, your credit card utilization rate is 60 percent. 

What a 0 Percent Utilization Rate Means for Your Score
If you are starting your credit history or have not yet used a credit card because of poor credit, credit reporting bureaus will likely indicate a 0 percent utilization rate. This is the same case if you have a credit card but use it very infrequently. While it may seem like a wise strategy to not use your card for fear of overcharging your account and accruing debt, not using your card at all will actually hurt your credit score. It's important to keep your credit card active to build credit and show creditors you are using your card responsibly.

How High is Too High for Credit Utilization?
On the other end of the spectrum, charging your card too much will also result in a lower credit score. When your only means of paying off bills or other debt is a credit card,  you might frequently overcharge your card. Consumers who have a high utilization rate on one card might be viewed as a risk by creditors because this indicator shows they have trouble repaying money. A report that shows a high utilization rate, which could reach 100 percent or more, usually means you are overcharging your card or have seen a credit limit drop because of outstanding debts. How much of an impact your utilization rate makes on your credit report also depends on the length of your credit history. A short history combined with a high credit utilization rate will affect your score much more compared to someone with a longer history.

What is the Right Credit Utilization Rate?
Since not using your card or overcharging them will negatively impact your credit score, it's important to use your credit card in moderation. Credit Karma suggests a credit card utilization rate of 30 percent or lower to maintain a good credit score. This means that if you have a credit card limit of $5,000, you should try to keep your balance at $1,500 or lower. Ensure you are actively using your credit cards by making small purchases every month and make payments on time to maintain an optimal credit utilization rate.