Forum: money.stackexchange.com
Tags: <credit-card><credit-score>
Title: What evidence that reporting a small utilization (vs no utilization) leads to a better credit rating?
Question: 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?

Answers:
sents: text: Since the credit score is generated from a secret formula by FICO, there can only be two kinds of evidence: Statements from FICO themselves.
text: Experiments done on an individual's credit score using different utilizations.
text: For the first type, @user662852's answer provides a statement from FICO, in the typically vague way that FICO is known for.
text: For the second type, @JoeTaxpayer helpfully ran an experiment that he detailed in an answer last year .
text: In it, he noted a small hit in his score when he went to 0%.
text: Whenever we talk about credit utilization's affect on credit score, it is important to note that utilization has no history.
text: It is an instantaneous number, based on your balance at the time of credit reporting for the current month.
text: 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.
answer_details: author: money.stackexchange.com/users/10997/Ben Miller - Remember Monica
score: 5
sents: text: "Better credit rating" unfortunately is too broad of a question.
text: The possible gains in a numerical FICO score will simply be too minimal to do your study!
text: 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%.
text: At least in a way that would alter anybody's behavior.
text: As such, you will not find empirical evidence for this argument (outside of Fair Isaac saying so themselves).
text: Now you did ask specifically about credit rating , which I should point out is different than credit score .
text: You do not need to spend any money to achieve a higher credit score.
text: So there is your 0% answer.
text: A credit rating on the other hand, includes spending behaviors that make an institution more likely to extend credit.
text: An institution is more likely to extend additional credit if they have seen utilization of their credit based financial products.
text: An institution is less likely to extend additional credit if they see 0% utilization on their credit based financial products.
text: An institution is more likely to close your credit based account if they see 0% utilization.
text: Your credit rating - with that institution - is now lower, without any affect on your credit score.
text: 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).
text: This part isn't "rational", it is cause and effect.
text: So you want to avoid making situations where your credit lines get cancelled.
text: Having 0% utilization is one of those exact situations.
text: If this wasn't satisfactory, due to lack of sources, just make a note of which paragraphs you want citations for.
answer_details: author: money.stackexchange.com/users/4833/CQM
score: 2
sents: text: What does Fair Issac themselves say about it?
text: 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.
answer_details: author: money.stackexchange.com/users/29003/user662852
score: 1
sents: text: Experian, the company that provides VantageScore and contributes to FICO scores, has this to say on the subject:
text: VantageScore recommends an overall utilization rate of no more than 30 percent.
text: However, the lower your utilization ratio, the better for your credit scores.
text: 1
text: That seems to imply that a lower utilization rate is always strictly better than a higher value with no lower bound.
text: Of course, the formulas aren't published so there is always a chance that they are simplifying the formula for laypeople.
answer_details: author: money.stackexchange.com/users/37629/Brian R
score: 1
sents: text: There are plenty of good answers and I don't want to weigh it down with more
text: but I did have a couple of things that I wanted to say for the record
text: and so here it is.
text: 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
text: but unfortunately we are bound by non-disclosure.
text: 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.
text: A Vantage 700+ is worthless compared to 700+ FICO.
text: 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.
text: The higher, the more insolvent they consider you and a higher risk, hence the lower score.
text: As to whether or not use at all or use a little.
text: 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.
text: 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.
text: 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.
text: Also LET THE STATEMENT CLOSE WITH A SMALL BALANCE
text: BEFORE PAYING IT IN FULL.
text: This shows the card has activity.
text: 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.
answer_details: author: money.stackexchange.com/users/11059/GµårÐïåñ
score: 1

Summary of the answers:
You are less likely to get additional credit if the company sees 0 utilization. They might consider that you don't use it because you are afraid you can't pay for it, or don't properly manage your liabilities. 
An institution is less likely to extend additional credit if they see 0% utilization on their credit based financial products. Sometimes 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, which implies that a lower utilization rate is strictly better than a higher value where they consider you more insolvent and a higher risk, hence the lower score. But if your utilization is below 1% or zero, then you will be as "dormant". To fulfil ideal utilization, keep it between 20-30%, pay it off in full and spread over several cards, anything higher and you take a hit, which is based on a formula. The golden rule of credit is, don't spend more than you have and don't spend more than you can pay off in full, and ensure that you never pay late or miss a payment.