Here’s what everyone gets wrong about using credit.

If you’ve ever read about how credit scores are calculated, you’ve probably heard of credit utilization. This is the ratio between your credit card balance and your credit limit. For example, if you have one credit card with a balance of $5,000 and a limit of $10,000, your credit utilization ratio is 50%.

Credit utilization is one of the most important factors in your credit score. And the golden rule that everyone repeats is to keep your credit utilization below 30%.

It’s not a bad rule. I’ve repeated it quite a few times. However, this is only a simplification of credit utilization and is not entirely accurate. Having a better understanding of how credit utilization works can make managing your credit score much easier.

30% is not a magic number. The lower the better.

The 30% rule for credit utilization always applies. If your credit rating is less than 30%, it is good, and if it is more than 30%, it is bad. This is the biggest misconception about credit utilization.

It is more accurate to say that the lower your credit utilization, the better. Utilization of 10% is better than 20% and better than 30%. Consumers with a FICO® score above 800, the highest range, have an average credit utilization rate of 7%.

What’s confusing is that a 0% credit utilization rate is actually considered worse than a 1% credit utilization rate. That’s according to Experian, one of three credit bureaus that calculate credit scores. This is something peculiar about the credit scoring system. But this is not something anyone needs to worry about. You can have an excellent credit score with a 0% or 1% utilization rate.

So where does the 30% rule come from? “There is no specific point at which utilization goes from good to bad, but 30% is the point where it begins to have a more pronounced negative impact on your credit score,” Experian said.

Only your current credit utilization matters.

Some people think they need to learn about and micromanage their credit utilization. This is understandable, especially if you use a free credit score tool that sends surprising updates like “Warning: Your credit utilization has increased.”

The only number that matters is your current credit utilization. This is what lenders look at when they check your credit and this is the number used to calculate your credit score. If your current credit utilization is 5%, it doesn’t matter if it was 75% two months ago. A couple of months ago, your high credit utilization would have affected your credit score, but not anymore.

If you’re due for any kind of credit check, you need to make sure your credit utilization is as low as possible. For example, credit utilization is important if you plan to apply for any of the following in the next month or two:

If no one is going to be checking your credit score in the near future, your credit utilization won’t be a big deal. However, you should aim to pay off your credit card balance in full each month. If you pay in full, you won’t be charged interest on your purchase and can avoid debt.

Credit utilization history may be important in new grading systems.

There are many credit scoring systems out there. The FICO® Score is the most widely used by lenders, but there are dozens of variations of this score. There are FICO® Score 8, FICO® Score 9, and FICO® Score 10, as well as other versions used for auto loans, credit cards, and mortgage loans.

The scoring systems currently in use do not take into account credit utilization over time. As explained above, only your current credit utilization is important. However, new credit scoring systems, including FICO® Score 10, look at data trends over 24 to 30 months.

Past credit utilization can become important as companies begin using these newer scoring systems. That’s not the case now.

How to Handle Credit Utilization

In summary, it’s always a good idea to pay your credit card bills in full if you want to avoid going into debt. This will lower your credit utilization ratio and help your credit score.

Even if your credit utilization increases from time to time, it’s not necessarily a problem. You don’t always have to keep it below 30%. That’s just a rule of thumb. The only time your credit utilization matters is when someone checks your credit score, and all that matters is your current credit utilization.

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