Why you don’t want to zero out your credit card
In general, using as little of your credit card limits as possible is better for your score.
So logic would suggest that paying off your credit cards early so that a zero balance is reported to the credit bureaus would produce the highest scores, right?
Turns out, having 1 percent of your credit limits in use may help your credit score even more than showing 0 percent usage.
Counterintuitive as it is, that’s how credit scoring works.
Why 1 percent is better than ■ 0 percent?
Credit scoring systems are designed to predict how likely you are to repay borrowed money. The two biggest factors — accounting for about two-thirds of your credit score — are paying on time and the amount you owe.
Credit utilization, or the percentage of your credit card limits you use, is one of the biggest levers you can pull to affect your score, and it works quickly: Your utilization changes as soon as card issuers report your new balances to the credit bureaus each month.
If you are trying to squeeze every possible point from credit utilization, the trick is to aim low — just above zero. Credit expert John Ulzheimer said data has shown that 1 percent credit utilization predicts slightly less risk than 0 percent, and scoring models reflect that.
“Having a low utilization indicates you are using credit in a responsible manner,” said Tommy Lee, principal scientist at FICO, one of the two dominant credit scores.
■ How to shoot for the 1 percent goal
If you’re aiming for a perfect 850, or are close to qualifying for a lower interest rate on a loan, shooting for 1 percent might help you gain a few points. You could aim to zero out your credit cards, knowing that your regular use of the cards will keep some small percentage of your limit in use.
Ulzheimer, who has worked for credit bureau Equifax and credit scoring company FICO, explains how: “If you can pay off your balance in full by the statement closing date, then you’ll get a statement with a zero balance and that’s what will appear on your credit reports.” Or, you can pay off a card in full by the due date and stop using the card entirely for the next billing cycle to get to a zero balance.
“But 1 percent could be better if you can pull it off,” Ulzheimer said.
What if I can’t make it ■ to 1 percent?
Keeping utilization less than 10 percent is a worthy goal. Lee said that the top 25 percent of FICO credit scorers use 7 percent of their credit limits. If you pay on time and keep balances low relative to credit limits, your scores will generally be high.
Ulzheimer said if you are fretting over whether you want a credit utilization of 1 percent or 0 percent, it’s worth noting that either is excellent. And it’s entirely possible to score a perfect 850 without the elusive 1 percent.
How that works is part of the “secret sauce” that scoring companies do not reveal.
How to get and
■ keep a high score
Nothing is more important to your score than paying bills on time. The scoring penalty for a missed payment is severe, and a payment that’s 30 or more days late can stay on your credit report for up to seven years.
Also, use cards lightly and keep balances low to keep your credit utilization low.
And monitor your credit — regular checkups are part of staying financially healthy.