Getting a high credit score can make it easier for consumers to save on life's biggest purchases. But many Americans who are stuck with average or below average credit may find it difficult to move up the credit score ladder.
In a new study, MagnifyMoney, a leading financial comparison and education website, partnered with VantageScore Solutions to see how much credit consumers are using — and how that impacts their credit score.
In the study, VantageScore delved into the credit score profiles of U.S. consumers who are using credit cards in 2017. Scores analyzed were on a 300 - 850 scale, using the VantageScore 3.0 score model.
We decided to home in on utilization — that's how much credit people are using compared to how much credit they have available to them. Then, we looked at how their credit utilization corresponded to their credit score.
What we found is that people with excellent credit share one main trait in common: They have incredibly low utilization rates.
If you want the highest score, you need to make sure you haven’t missed any payments in the past and don’t have any public records, collection items or judgments. However, what this data shows is that even if you have a perfect payment history, low utilization is critical to get the highest score.
Key findings include...
- The best scores have 16x the credit limit of the worst scores: People with the best scores (above 800) have available credit of $46,735, 16x that of the $2,816 of those with the worst scores (below 450), but their outstanding balances are about the same at $2,231 (above 800) vs $2,653 (below 450)
- People with scores 601-650 have the biggest credit card bills: People with scores between 601 and 650 carry the biggest balances, at over $10k, or nearly 2x the average of all consumers.
- The average credit card holder has $29,197 in credit lines. With an average balance of $5,720, the average holder is using 20% of available credit.
- Getting above 700 is the biggest hurdle. People with scores 701-750 have average utilization of 27% vs 47% for those with scores 651-700, the biggest utilization gap of any score band. Average balances for people with scores 651-700 are about $3,000 higher than those with scores in the 701-750 range.
The Power of the Utilization Rate
One of the most influential metrics in credit scoring is called “revolving utilization.” This metric, informally referred to as the debt-to-limit ratio, calculates just how leveraged your credit cards are at any given time by comparing your balances to your credit limits. According to VantageScore, and using data provided by the three credit reporting agencies, people with credit scores above 800 have an average debt-to-limit ratio of just 5%.
To calculate the debt-to-limit ratio you must do a little math. The first thing you’ll do is add up the balances on all of your credit cards, which includes retail store and gas credit cards. Now add up the credit limits of those same cards and any other unused credit cards. Now you’re ready to do the math. Divide the total credit card balance by the total credit limit, and then multiple that number by 100 and you’ll get your percentage.
NOTE: Do NOT include any balances or original loan amounts from installment loans like mortgages, student loans, or auto loans. Revolving utilization is only calculated from your revolving credit card accounts.
Inside the Wallet of Someone With Perfect Credit
As you can see from the chart below, those of you with VantageScore credit scores over 800 have an average debt-to-limit ratio of just 5%. The math it took to get to 5% looks something like this: you have an average total balance of $2,231 and an average total credit limit of $46,735. When you divide $2,231 by $46,735 you get 5% — 5% is a fantastic debt-to-limit ratio. This is where you want to be!
Inside the Wallet of Someone With Bad Credit
On the other end of the score range — those of you with the lowest possible scores, 450 and below — you have an average debt-to-limit ratio of 94%, which is very high and very poor. Your average total balance is $2,653 and an average total credit limit of $2,816. When you divide $2,653 by $2,816 you get 94%. Ninety-four percent is simply too high and a significant reason why your scores are so low. This is not where you want to be!
It is important to point out that the debt-to-limit ratio is just that, a ratio. It’s all about the relationship between the balance and credit limit, not so much how large or how small your balances are or how large or how small your credit limits are. In fact, the people whose scores are the very lowest don’t have that much more average credit card debt than the people with the highest scores — $2,231 for the high scorers and $2,653 for the low scorers.
The significant difference between the two populations is in the credit limits. The folks with the highest scores have the largest total credit limit, $46,735 as compared to $2,816 for the people with the lowest scores.
You can see just how problematic it is to have lower limits as it makes even modest credit card balances very problematic for your credit scores as they take up a considerable portion of your available credit. You get too close to maxing out your available credit too quickly.
Use These Findings to Boost Your Credit Score
Here are MagnifyMoney's tips on improving a low credit score:
Step 1: Get a line of credit
In order to establish credit history, you need to have a form of credit. The simplest way for you to begin will be to open a credit card. If your score is low or non-existent, then you’ll need to apply for a secured card or a store card.
Secured Card: You’ll use your own money as collateral by putting down a deposit of a few hundred dollars with the bank. Typically, that amount will then be your credit limit. Once you prove you’re responsible, you can get back your deposit and upgrade to a regular credit card. [Read more here]
Store Card: People with a low credit score can often still get store cards because banks are more likely to approve users who apply through the store. The catch is that the interest rates are often very high if you can’t make your payments. [Read more here]
Step 2: Keep your utilization rate low
Utilization is the amount of your credit limit you spend each month. For example, if you have a $500 credit limit and spend $50 in a month, you’re utilization will be 10%. Your utilization is part of what determines your credit score.
Your goal should be to never exceed 30% of your credit limit. Ideally, you should be even lower than 30% because the lower your utilization rate, the better your score will be.
We recommend you make one small purchase (hello, pack of gum) a month to keep your utilization low and help increase your credit score at a faster rate.
Step 3: Pay in full, and on time, each month
The easiest way to prove you’re responsible is to only charge what you can afford. Never use your credit card to buy an item you won’t be able to pay off on time and in full each month.
Being late on your payments has a huge, negative impact on your credit score.
There is also no advantage to only paying the minimum amount due on your card. That will only result in you paying interest and does nothing to help your credit score. So just save yourself money and pay your entire bill.
Step 4: Avoid credit card debt
This goes hand-and-hand with step three. By only purchasing what you can pay off in full, you’ll never accumulate credit card debt.
If you’re already in debt from the misuse of credit cards, then make sure you continue to pay at least the minimum due on time each month. Paying on time is the number one indicator of a responsible borrower. You should consider applying for a personal loan, and using the money from the loan to pay off your credit card debt. Personal loan companies have interest rates that start as low as 4.25%, and they are approving people with credit scores as low as 550. You can shop around for a personal loan without hurting your score, because the lenders will approve you using a soft pull (which doesn’t impact your score). A recent study by Lending Club showed that people who paid off their credit card debt with a personal loan saw their score increase by 31% on average, right away. You can look for the best personal loans using this personal loan tool. After you pay off your credit cards with the proceeds on the loan, do not build up your debt again. Instead, just make one purchase each month and pay it off in full.
Once you pay off your cards, resist the urge to close them. Closing your cards will not only lower your utilization but remove history which damages your score in the “length of history” category.
Step 5: As your score improves, so do your options for better credit cards
You’ll start to get credit card offers as you begin to build your credit history and improve your score. Credit card companies still love sending snail mail.
Beware of any offers, especially for cash back cards, while your score is below 650. These cards typically provide little value and can smack you with high interest rates if you fail to follow step three.
Once you get your credit score above 680, the good credit card offers will start rolling in. You can have your pick of the top-tier reward credit cards and start using your regular spending to get cash back or rack up points for travel.
Step 6: Protect your score
Once you’ve achieved a higher credit score, but sure to protect it by following these simple steps:
Always pay on time – late or missed payments will cost you dearly
Try to keep your credit used below 30% of your available credit
If you apply for a store card to increase your credit then immediately put in the freezer (literally if you have to) and avoid spending
Be sure to check your credit reports for accuracy and signs of fraud – you’re entitled to one free report per year from each of the three credit bureaus
Goldman Sachs Bank USA High-yield 12 Month CD
Synchrony Bank High Yield Savings
Barclays Online Savings Account
Ally Bank High Yield 12-Month CD
* All banks listed are a Member FDIC.