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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 go above 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.
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%."
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.
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% APR for the first 21 months on balance transfers (then 14.74% to 24.74% variable APR; balance transfers must be completed within four months of account opening).
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 are confident you won't overspend with a higher credit limit.
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.