Credit utilization is a term you’ll often hear when it comes to credit scores. Keeping your credit utilization (also known as credit use) below 30% is commonly cited as one of the best ways to raise a bad credit score. The lower your use, however, the better the results for credit repair. But why not aim lower? Here’s why you should strive for 1% credit utilization.
What Is Credit Utilization?
First, a brief refresher course on credit utilization: Credit utilization has the second-largest impact in determining your credit score. Approximately 30% of a FICO score comes from credit use – trailing only payment history (35%).
Credit utilization may seem confusing, but it’s a straightforward principle. Your bank lends you money through a credit card, and your usage refers to how much of that available credit you are spending. If you have a $1,000 credit limit and a card balance of $500, your credit use is 50%.
Why Aim for 1% Credit Utilization?
Keeping your credit use below 30% is one of the easiest ways to maintain a healthy credit score. For those looking to raise their credit score, keeping credit utilization below 10% is even better. Essentially, the lower you reduce your credit use, the better. So why 1% credit utilization and not 0%?
Having a credit use percentage of zero doesn’t necessarily mean you aren’t using your credit cards. Although it could, it may also mean you are repaying what you spend immediately. Still, as CNBC reports, some credit bureaus dislike 0% credit utilization. The reason for this disapproval is that bureaus view the cardholder as not using their credit at all – making them less attractive to lenders who make their money off interest payments.
How to Reach 1% Credit Utilization
So, how do you reach 1% credit use? The easiest way to achieve this goal is by having multiple credit card accounts. Keep your utilization at zero for all cards except the one you use the most. Then, try and keep that card’s utilization rate as low as possible.
If the 1% usage rate seems impractical, try to keep your credit use in the single digits. Having a usage rate of 5%, for example, will dramatically improve your credit score in as little as a few months.
Credit Use Hacks
If you are looking to raise your credit score quickly but aren’t sure if your credit utilization is low enough, there are simple tricks you can use. One such method is opening a secured card account and making a large deposit. This is something covered recently in a related article: Can You Raise Your Credit Score By 100 Points in a Month?
A card, like the OpenSky Visa Credit Card, features no credit check, for instance. If you want to decrease credit use dramatically, open an OpenSky account and place a large deposit. You won’t have to worry about the negative impact of a hard inquiry on your credit score while still seeing a significant drop in overall credit use.
If you are looking to raise your credit score, keeping your credit utilization low is critical. No credit use appearing on your credit report, however, might result in more negatives than positives. For this reason, try to keep your credit use as close to 1% as possible.
Related Article: Can You Lose Your House Because of Credit Card Debt?