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Credit score utilization ratio, the magic number - Myth #4

Debunking the myth of the 30 Percent Solution, the credit card balance to-limit ratio safe zone

| By Greg Fisher,

Regarding the so-called "utilization ratio" aspect of credit scores, consumer reporting agency Experian states: "There is no magic percentage. The lower your utilization rate, the better."

If you're a credit card company, of course you're not going to use the word zero when talking about that ratio. Admitting that the path to credit score perfection is to have no balance at all is not good business (or, as the Silicon Valley kewl say: A good business model).

A page published in 2008 gives examples of mainstream media and others giving advice ranging from having no balance to having one merely under 100 percent of the limits. To be sure, 30% is most prominent in that list; a popular notion ingrained in the worldwide credit scoring lore and keyboard finger-flapping/wanton-uploading/churning.

But, this isn't a popularity (or popular media) contest, and what most people believe is not always true. This time (exploding this myth), it may be different.

In the case of major credit cards, the technical term for part of such so-called utilization is "Proportion of balances to credit limits on bank/national revolving or other revolving accounts is too high," one of the dozens of reasons that a FICO credit score may not be higher.

And who proclaimed that mouthful (the longest reason; so long it needs two lines) the term? It was the scorekeeper. The Wizard. The originator of the Real Big Credit Score. The FICO score company, itself, Fair Isaac.

And lo. They—they, the keepers of the Secret—know what's what.

Or, at least we can hope so. But the official list of factors includes another that starts with the word proportion: "Proportion of loan balances to loan amounts is too high."

Since "No recent revolving balances" is also an actual factor, somebody was bound to come up with an expedient, bloggity blogging-convenient safe zone. Somehow 30 percent stuck. Just who stuck it or started it is another mystery. Perhaps it was conflation with an entirely different use of the term 30 percent: Amounts owed, Fair Isaac's second of its 5 named categories of its paraphrase of the factors (that includes the proportions factors) at the center of another urban legend. And, this one, Myth #4, is a whopper.

The banks must love it: Don't worry, children. Everything will be alright. All you have to do is keep it under 30. Just remember: 30. Repeat: 30, 30, Thirty.

In contrast to Experian's statement above (not that you can believe it), Fair Isaac states: "There's no ideal utilization to shoot for, because as with most things, it depends on everything else on your report. But as a general rule, you want to try to keep your utilization on any one card, and across all of your credit cards, below 50% to avoid the risk of hurting your FICO score."