Is a zero balance credit utilization good for my credit score?

Credit utilization refers to how much of your credit line(s) is in use; it’s also called your debt-to-limit ratio. If your cumulative limit across your three credit cards is $10,000 and you carry a cumulative balance of $1,500, then your credit utilization is 15 percent. (Less than 30 percent is recommended.) Is it better to have a zero percent credit utilization or to carry a small balance and make on-time payments? Let’s discuss.

Credit utilization’s impact on your credit score

Although it would seem zero percent credit utilization is ideal in credit scoring, that’s not the case.  Zero balances are considered as a sign of infrequent credit use, which is a negative marker in credit scoring. This lack of spending history gives potential lenders little insight into your payment habits: You might be a responsible borrower, or you could be someone who will be prone to missing payments once you have a large line of credit such as a mortgage.   

How to maintain 1 percent credit utilization

If you want to experiment with your score by maintaining 1 percent utilization, you’ll need to find out when each of your card issuers reports account information to the credit bureaus. (In many cases, it’s around the end of your monthly billing period.) So, if you have a credit card with a $5,000 credit limit, you’ll want to ensure that the balance is $50 on the day you expect your issuer to report. Do the same for any other cards you own to keep your overall utilization at 1 percent. 

The role of credit bureau reporting dates

Even if you pay your balance(s) in full before the due date, your credit report could reflect high utilization—and potentially lower your credit score —depending on when your issuer reports the account information to the credit bureaus. 

This hypothetical example involves a card with a credit limit of $5,000 and a $500 balance. 

  • Payment due date: The 25th of the month.
  • Date issuer reports account information to credit bureaus: The 20th of the month.
  • Balance as of the 19th: $500.
  • Reported utilization after $450 payment made on the 19th: 1 percent.
  • Reported utilization if $500 balance is paid in full on the 25th: 10 percent.

How you achieve 1 percent utilization depends on how much credit you have available and how you use your card. For example, if you have only one card that has a $500 credit limit, you can simply buy one cup of coffee at Starbucks with it and wait until after the balance is reported to pay off your card.

Let’s talk about your specific situation. Connect with Scorewell today to discuss factors that determine your credit score and strategies to improve your financial picture. 
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