Earlier this month, we reported on a counterintuitive way to increase your credit score: Ask for more credit.
But data from credit bureau Experian shows this strategy might not be available to some consumers, who are utilizing credit cards in a harmful manner.
The bureau looked at credit information from different generations and found that consumers, on average, use more than a third of their available bank card credit. Young adults ages 19 to 34 use even more of their available credit — 43% on average, the bureau found in data published last year.
To be clear, it is not recommended to use a big chunk of your available credit.
|Age||Credit card utilization||Credit card balances||Total debt||Average credit score|
Credit utilization is one of the major factors that shapes your credit score. Put simply, it is the amount of credit you use versus the amount of credit available to you.
Different experts offer varying advice on how much utilization is too much. 10%? 20%? 30%? The truth is nobody can say for certain. Fair Isaac Corp., which developed the popular FICO score, says only that the more debt you have, the lower your score will be.
“I would say get that credit card debt close to 0,” says Ken Chaplin, senior vice president and chief marketing officer of the consumer division for TransUnion, another of the credit bureaus.
So using nearly half of your available credit may damage your credit score, but by how much isn’t clear.
“There’s not a hard-and-fast rule that going from 25% to 50% (utilization) your score will decrease by this much,” Chaplin says.
Utilization vs. scores
There are other factors that determine your credit score, so looking at the utilization ratio alone won’t tell you the whole story. The single biggest factor that goes into your score is your payment history.
But the mix of credit available to you – such as revolving and installment accounts – your pursuit of new credit and the length of your credit history also matter.
So it’s probably a mix of several problems like owing too much and paying late that has left so many credit scores damaged. In fact, TransUnion found a whopping 43% of millennials have subprime credit scores.
With scores that low, getting credit becomes difficult. And when lenders approve new credit, it comes with a hefty interest rate.
What you can do
One of the best ways to improve credit, Chaplin says, is to pay down credit card debt. But don’t close your cards once you pay them off. That will reduce your available credit, which will increase your utilization and potentially damage your score.
“The most important thing a person can do to build or maintain their score is to pay their bills on time and in full each month,” Chaplin says.
You also should check your credit reports for errors or signs of fraud — that could also impact scores.
Once you begin raising your score, you can employ the strategy I referenced at the top of this post: Call your credit card company and ask for a credit line increase.
One thing that may hold your credit score back is owning a credit card with a low credit limit, as the example below of what’s called a credit report “reason code” — the specific factors that keep your credit score from being higher — shows.
Your largest credit limit on open bankcard or revolving accounts is too low
The largest credit limit on all your open bankcard or revolving accounts in your credit file is low. Having higher limits gives you access to credit without seeking new loans or becoming overextended.
What you can do
Use credit responsibly and always make payments on time with your existing accounts. After a period of successfully managing your accounts, you can contact your creditors and request increases to your credit limits.
If you get a credit line increase don’t use it. Leaving that credit untouched will lower your utilization rate, which could further boost your score.