credit card utilization and credit score impacts

Credit card utilization and credit score impacts

Date: June 24, 2020

Any discussion of great credit scores undoubtedly includes mention of how well, or how poorly, a consumer manages credit card debt. Besides avoiding late payments, limiting the amount of credit card debt that shows up on your credit reports is the next best way to optimize a credit score.

VantageScore partnered with MagnifyMoney.com, an online financial education and comparison tool, to conduct research about how influential the revolving debt metrics are in consumer credit scores. The study looked at a sample of U.S. consumers with a VantageScore credit score ranging from 300-850 and correlated the relationship between credit scores and utilization (i.e., how much credit consumers are using vs. how much credit they have available). In a nutshell: the lower the utilization, the better the credit score.

So, what is it about a utilization rate that makes it so powerful in obtaining a solid credit score? It comes down to something called debt-to-limit ratio (also known as “revolving utilization”), which is:

The greater a consumer’s ability to pay down a debt (i.e., instead of making the minimum payment), the more this demonstrates a consumer’s greater understanding of his or her personal finances and a greater likelihood that a consumer will pay back loans responsibly. A lower utilization rate also shows a lower likelihood that a consumer is unable to meet his or her debt obligations, or in industry terms, a consumer has a lower probability to default.

According to the data, consumers who have the highest scores, 800+, have an average credit card balance of just $2,231. When combined with an average aggregate credit limit of just over $46,700, those with the highest scores have utilized less than 5% of the available credit on their credit cards.

Other key findings from the research study include:

  • Sky’s the (credit) limitThe folks with the highest scores have the largest total credit limit; $46,735 as compared to $2,816 for the people with the lowest scores.
  • At the middle of the road — The average credit card holder has $29,197 in credit lines. With an average balance of $5,720, the average holder is using 20% of the available credit.
  • Heading downhill People with scores between 601 and 650 carry the biggest credit card bills, at over $10k, or nearly 2x the average of all consumers.
  • Pathway to progress People with scores 701-750 have average utilization of 27% vs. 47% for those with scores 651-700, the biggest utilization gap of any score band. Average balances for people with scores 651-700 are roughly $3,000 higher than those with scores in the 701-750 range.

What to do now?

The debt-to-limit ratio is just math, and simple math at that. When a consumer is able to lower balances, increase limits or pull off a combination of both, then his or her credit score has no choice but to go up. For those with lower credit scores and/or a higher utilization, it might be worth it to refocus budgets and spending habits to allow for an aggressive balance elimination strategy. Either way, it’s financially smart to do so because interest rates on credit cards are typically high.

In addition, be sure to monitor a VantageScore credit score at no cost using one of these websites.