Should You Keep Your Credit Utilization at 30% or Below?

For many of us, using credit cards or other forms of credit is just part of life. While this may be especially true during the holidays, it can be more convenient in many other cases throughout the year. For instance, if you’re serving overseas, using a credit card may often be simpler than using the local currency.

But when you spend with credit, there’s a lot more you need to think about -- like your credit score and credit utilization. When it comes to credit utilization, it can be tricky to figure out just how much you should be using.

Keep reading to find out more about credit utilization, its impact on your credit score, and how to improve your credit score.

There are two main types of credit score: the FICO Score and the VantageScore. In most cases, the FICO score is what’s used for lending decisions, so we’ll focus on that.

FICO Scores are calculated using five different pieces of data. Each piece of data makes up a different percentage of your overall score.

Credit usage or credit utilization is the second-most important factor in calculating your credit score. If you want the best credit score, what’s the right amount of credit to use?

There’s a popular rule of thumb you may have heard about -- the 30% rule. This means you should take care not to spend more than 30% of your available credit at any given time. For instance, let’s say you had a $5,000 monthly credit limit on your credit card. According to the 30% rule, you’d want to be sure you didn’t spend more than $1,500 per month, or 30%.

But it turns out that the 30% rule may be outdated advice. In fact, using much less than 30% of your credit may give better results when it comes to increasing your credit score. According to Can Arkali from FICO, the customers with the best credit scores -- the top 25% who have a score of 795 or higher -- use an average of only 7% of their credit.

Going back to the example above, someone with a credit limit of $5,000 may find it challenging to spend only 7% or $350 per month. But this is only the case if you pay your credit card bill once a month. You can always make multiple payments toward your credit card throughout the month in order to keep your credit utilization low.

Credit utilization is just one important piece when it comes to determining your credit score. Of course, being mindful about using less of your available credit or making more frequent payments when possible can help boost your score.

But these are far from the only steps you can take to get a credit score you’re happy with.

Remember: Making your monthly payments on time and paying your balance in full whenever possible can go a long way in increasing your credit score. If you don’t pay on time or get in the habit of making only minimum payments, it does more than impact your credit score. You’ll also get hit with additional interest charges. When interest adds up, it only makes it harder for you to pay off your bill in the future.

You’ll also want to review your credit reports at least once a year. Reviewing credit reports can help you catch any errors or mistakes. And it can help you figure out exactly what is impacting your score the most. That way, you’ll know which particular areas you need to work on.

You’re allowed to request a free credit report from each of the three major credit bureaus -- Equifax, Experian, and TransUnion -- once per year.

Requesting your credit report is not the same thing as making a credit inquiry, don’t worry -- viewing your credit report will not hurt your credit score. However, applying for too many credit lines at once would mean multiple credit inquiries in a short amount of time, and this can negatively impact your score.

And another thing can negatively impact your credit score: becoming a victim of identity theft or fraud, even though it isn’t your fault. This means it’s extremely important that you pay attention to your credit score -- in some cases, that could be the first red flag that something is wrong.

At Armed Forces Bank, we are proud to offer several products that can help you protect yourself from identity theft and fraud, whether you’re a personal banking or business banking customer.

Our Access Rewards Checking** offers Credit Monitoring and Reporting, as well as Identity Theft Monitoring & Resolution† Services.

And our Business Banking services include ACH Block and Filter, Check Positive Pay, and e.Business -- all of which help monitor your account and ensure you're protected from fraud.

Your credit score could be your key to lower interest rates and other financial benefits. We’re here to help protect it.

At Armed Forces Bank, we have been committed to serving those who serve since 1907. Let us be your financial partner. We’re here to answer your questions about credit and credit usage. And we offer a secured credit builder credit card* for those looking to improve their score.

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