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In North America, it is common advice to make your credit card shows utilization. That is, let some balance remain until the statement issues so that utilization will be reported to the credit agencies. (Of course, pay it off before the due date to avoid interest payments.)

However, is there any evidence that credit scores are actually better for people with a small reported utilization vs people with zero reported utilization all other things being equal?

  • While I cannot give you a definite answer, it does make sense that low utilization is better than no utilization. A credit score is showing how worthy you are through factors like how consistent you are with payments. If you aren't utilizing any credit, you aren't making any payments to score you on - even if you have the availability of credit – William Dunne Feb 7 '16 at 20:38
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    @WilliamDunne Thanks :) The argument that this should be the case makes sense to me too. I've read a bunch of them on this site and they seem reasonable. However, I'm looking for evidence that this is actually the case. – user36524 Feb 7 '16 at 20:49
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    Unfortunately, the formulas used are proprietary and unpublished. It's all hints and guesswork. Which is one of the reasons I keep saying that playing games to try to optimize your credit rating is probably a massive waste of effort. Be financially responsible and your credit rating will take care of itself. Really. – keshlam Feb 7 '16 at 23:37
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    @keshlam So when people give this advice, it's just based on best-guesses about how the score is computed? No actual information or suggestion by the rating agencies that this is a factor? If that is the case, I think a good answer to this question would emphasize that we don't know whether this advice to show utilization actually matters. – user36524 Feb 8 '16 at 6:06
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    @Dawn In that case, I'm with keshlam - I think it's pointless to try to second-guess your score. I'm not aware of any guarantee that they even keep the same formula from year to year. I can say that I worked at a bank as an intern (way back), and at that time the underwriters for mortgages did look at utilization as one factor - but that was separate from the numerical score that you say interest you. – user32479 Feb 9 '16 at 2:24
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Since the credit score is generated from a secret formula by FICO, there can only be two kinds of evidence:

  1. Statements from FICO themselves.

  2. Experiments done on an individual's credit score using different utilizations.

For the first type, @user662852's answer provides a statement from FICO, in the typically vague way that FICO is known for.

For the second type, @JoeTaxpayer helpfully ran an experiment that he detailed in an answer last year. In it, he noted a small hit in his score when he went to 0%.

Whenever we talk about credit utilization's affect on credit score, it is important to note that utilization has no history. It is an instantaneous number, based on your balance at the time of credit reporting for the current month. Therefore, you could have the worst utilization ratio possible (whatever that is), and if you go to the best utilization ratio possible the next month, last month's utilization has no effect.

  • That experiment had only a single sample in the zero utilization case, and doesn't report whether all other factors were kept unchanged. But, yes, that kind of empirical testing would be great to see! – user36524 Feb 10 '16 at 17:52
  • @Dawn True, it was a very unscientific experiment. On the plus side, it was done in consecutive months. And after he was done with the experiments and returned to his "normal" utilization the following month, he reported that his score was back to its original value. – Ben Miller - Reinstate Monica Feb 10 '16 at 17:54
  • @BenMiller But this is also assuming they don't take an average of the utilization ratio over x amount of months - which also could be a possibility. – Ross Feb 10 '16 at 22:09
  • @Ross Anything is possible, but on the credit reports I've seen, it only shows my current balance; there aren't any historical balances on them. – Ben Miller - Reinstate Monica Feb 10 '16 at 22:13
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"Better credit rating" unfortunately is too broad of a question. The possible gains in a numerical FICO score will simply be too minimal to do your study! Comparing low utilization of 1-2% vs 0% for differences are problematic, as the utilization factor - which is empirically known - stops having a meaningful effect on your scores below 10%. At least in a way that would alter anybody's behavior.

As such, you will not find empirical evidence for this argument (outside of Fair Isaac saying so themselves).

Now you did ask specifically about credit rating, which I should point out is different than credit score.

You do not need to spend any money to achieve a higher credit score. So there is your 0% answer. A credit rating on the other hand, includes spending behaviors that make an institution more likely to extend credit.

An institution is more likely to extend additional credit if they have seen utilization of their credit based financial products. An institution is less likely to extend additional credit if they see 0% utilization on their credit based financial products. An institution is more likely to close your credit based account if they see 0% utilization. Your credit rating - with that institution - is now lower, without any affect on your credit score.

BUT, by having a line of credit unilaterally closed by the institution, now your credit score becomes affected due to possibly lowered Average Age of Accounts, and lower amount of overall credit (increasing the utilization % that you have across other credit lines). This part isn't "rational", it is cause and effect.

So you want to avoid making situations where your credit lines get cancelled. Having 0% utilization is one of those exact situations.

If this wasn't satisfactory, due to lack of sources, just make a note of which paragraphs you want citations for.

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What does Fair Issac themselves say about it?

In some cases, a low credit utilization ratio will have a more positive impact on your FICO Scores than not using any of your available credit at all.

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Experian, the company that provides VantageScore and contributes to FICO scores, has this to say on the subject:

VantageScore recommends an overall utilization rate of no more than 30 percent. However, the lower your utilization ratio, the better for your credit scores. 1

That seems to imply that a lower utilization rate is always strictly better than a higher value with no lower bound. Of course, the formulas aren't published so there is always a chance that they are simplifying the formula for laypeople.

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There are plenty of good answers and I don't want to weigh it down with more but I did have a couple of things that I wanted to say for the record and so here it is.

Yes the formulas are "secret" and while companies like Fair Isaac (makers of the FICO score) does give special insider seminars where they DO reveal a lot but unfortunately we are bound by non-disclosure. Vantage, aka FAKO score, is not commonly used in any significant area of evaluation and can often lead to false sense of how good your credit is because their scores are always at a higher point than FICO. A Vantage 700+ is worthless compared to 700+ FICO.

However, this much I can confirm, to ensure that you generally fulfill ideal utilization, keep it between 20-30% anything higher and you take a hit, how much is based on the formula but a hit none the less. The higher, the more insolvent they consider you and a higher risk, hence the lower score.

As to whether or not use at all or use a little. Keep in mind that if your utilization is below 1% or none, then you are marked in the calculation as "dormant" which means that account won't factor into the calculations because they logic that if you aren't using it but have it, you either can't because you are afraid you can't pay for it, or that you don't properly manage your liabilities. So it is strongly recommended to keep a utilization of 2-4% where you can pay it off in full and spread the love across all your cards, so none get the dormant status.

Limit your spending on your less desired cards to about $35 on the low end and no more than 5% of the total credit limit on that card. Also LET THE STATEMENT CLOSE WITH A SMALL BALANCE BEFORE PAYING IT IN FULL. This shows the card has activity. Regardless, follow the golden rule of credit, don't spend more than you have, don't spend more than you can pay off in full, and NEVER EVER pay late or miss a payment.

  • What is your thought on the commonly held belief that canceling unused credit cards can actually hurt your credit score because it lowers your overall utilization percentage? – TTT Mar 10 '16 at 19:57
  • The closures DO HURT but not because your UTI goes down but rather because you just lost the "lenght of history" contributions of that account which is likely to be on the older side (meaning you've had it longer) and killing it will reduce your age of credit to what is now the oldest account and newer accounts average to lower that even further. So that's what's hurting you. Ideally, if you don't want to use a card anymore, don't kill it, just make sure it doesn't become tagged as dormant (which will remove it from all calculations) and hence the strategy I proposed above to keep it relevant. – GµårÐïåñ Mar 10 '16 at 20:47
  • If you're right, then the conventional wisdom is wrong: myfico.com/crediteducation/questions/… (Hmmm, isn't that the horses mouth?) – TTT Mar 10 '16 at 20:55
  • I have been a FICO contributor and been through their training. That being said, no it is not. They are simply taking another approach to it by purely looking at mathematical net effect (which even they admit is not always in your favor, if you read carefully) where if closing the card results in the debt/credit ratio to go down, then your benefit from that will counter or balance the loss of the age of account. They don't, can't and probably will never divulge the "behavioral" factors that ACTUALLY govern credit scores as much if not more than just the "factors" commonly visible. – GµårÐïåñ Mar 11 '16 at 3:28
  • Take for example the fact that if you have too many inquiries, you lose A LOT of points for a long time. But if that is purely the math of it and logic of it, then why is it that when you do say a bunch of similar attempts for credit, they bundle them all for about a month so that they don't pinch off so much from credit that you end up not qualifying otherwise. That's behavioral mitigation, not mathematical. – GµårÐïåñ Mar 11 '16 at 3:30

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