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; see rates and fees). 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
Keeping a zero balance is a sign that you're being responsible with the credit extended to you. As long as you keep utilization low and continue on-time payments with a zero balance, there's a good chance you'll see your credit score rise, as well.
Is it good to have $0 on credit card balance? ›
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.
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.
Can you build credit with 0% utilization? ›
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 long does it take to build a good credit score from zero? ›
Whatever your reason for wondering how long it takes to get a credit score, you can generally expect it to take about six months – and usually longer to get into the good-to-exceptional credit score range.
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.
Should I zero out my credit card every month? ›
Paying off your credit card balance every month is one of the factors that can help you improve your scores. Companies use several factors to calculate your credit scores. One factor they look at is how much credit you are using compared to how much you have available.
What is the 15 3 rule? ›
You make one payment 15 days before your statement is due and another payment three days before the due date. By doing this, you can lower your overall credit utilization ratio, which can raise your credit score. Keeping a good credit score is important if you want to apply for new credit cards.
How does 0% work on a credit card? ›
0% credit cards can let you borrow without paying interest
This usually relies on you using your card for its intended purpose (e.g. card purchases or balance transfers) and paying off your balance before your offer ends.
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.
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 do I boost my credit score? ›
How to Build Good Credit
- Review your credit reports.
- Get a handle on bill payments.
- Use 30% or less of your available credit.
- Limit requests for new credit.
- Pad out a thin credit file.
- Keep your old accounts open and deal with delinquencies.
- Consider consolidating your debt.
- Track your progress with credit monitoring.
"Paid in full will have a positive effect on your credit score, and even more so if all payments were made on time," Castleman said. That's because out of all the factors that are used to calculate your credit score, payment history is the most heavily weighted at 35% of the total score.
Will paying off your entire credit card balance in full every month hurt your score? ›
If you regularly use your credit card to make purchases but repay it in full, your credit score will most likely be better than if you carry the balance month to month. Your credit utilization ratio is another important factor that affects your credit score.
Why is my credit score going down when I pay on time? ›
Using more of your credit card balance than usual — even if you pay on time — can reduce your score until a new, lower balance is reported the following month. Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed.
Why did my credit score drop if I have no debt? ›
There's a mistake in your credit report. Your credit scores are based on the data in your credit reports. Credit report mistakes like a transposed number, a payment reported to the wrong account or a payment reported late when it wasn't can hurt your score.
How do you build credit with no debt? ›
Here are the best ways to build credit:
- Get a Store Card. ...
- Apply for a Secured Credit Card at a Bank. ...
- Start a Digital Checking Account. ...
- Apply for a Credit-Builder Loan. ...
- Find a Co-Signer. ...
- Become an Authorized User on Another Person's Credit Card. ...
- Report Rent and Utility Payments to Credit Bureaus. ...
- Consider a Student Credit Card.
