But while this is a good guideline, it's helpful to put the "rule of thumb" into context with how much credit people are really using.
Below, CNBC Select shares how much credit the average person uses and why your credit utilization rate matters.
CNBC Select asked representatives of two credit bureaus, Equifax and TransUnion, for the data they had on average credit utilization rates.
According to an Equifax spokesperson, the average credit utilization as of June 15, 2020, is 19.2% — a historical low since Equifax began tracking the data in 2009.
Putting this into context is important: We're in the midst of a recession and global public health crisis. As millions of Americans are financially strained and banks have cut back on lending, it makes sense that people would be using less credit than ever in efforts to prevent going into debt.
Generally speaking, however, outside of the pandemic, Equifax leveraged data from Equifax Credit Trends intelligence tool to find that credit card utilization has remained between 20% and 22% of total credit limits since the spring of 2011, with seasonal variation. TransUnion had similar findings, reporting that the average credit utilization rate in Q1 2020 was 20.4%.
Your credit utilization rate, also known as your debt-to-credit ratio, is an important factor that helps determine your credit score.
So, if you have an $800 credit card balance on your Chase Freedom® and you have a $2,000 credit card limit, your credit utilization rate is 40%:
($800 / $2,000 = 0.4 X 100 = 40%)
Your utilization rate matters because it makes up 30% of your FICO credit score, and a good credit score can go a long way in helping you qualify for the best credit cards, such as the Blue Cash Preferred® Card from American Express for grocery rewards, the Capital One® Savor® Cash Rewards Credit Card for entertainment rewards and the Wells Fargo Propel American Express® Card for travel rewards.
Before approving your credit application, lenders and creditors also look at your utilization rate to determine how much of a risk you are. A high utilization indicates that you could be a subprime borrower who may have trouble paying back a loan or credit card bill because you already have a lot of debt, whereas a low utilization rate illustrates you're able to manage credit responsibly.
No matter where your credit utilization rate stacks up against the average, know that the magic to a healthy utilization ratio is maintaining a low credit card balance and a high credit limit. The closer you can get to having a single-digit utilization, the better. Prioritize paying down your balances and once you've made a dent in your debt, you could consider asking for a credit limit increase.
Information about the Capital One® Savor® Cash Rewards Credit Card and Wells Fargo Propel American Express® Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.