High Utilization of Credit Lines vs. Insufficient Utilization Information

Using too much of your credit limit --- and, sometimes, not using enough of it --- can damage your credit score. A high utilization of credit lines, however, is far more dangerous than insufficient utilization, because it means a large debt burden. Fortunately, you can solve utilization problems relatively quickly as opposed to other credit problems, such as late payments, which can take years to recover from.

Identification

A high utilization of credit lines means using too much of your limit. Most experts put the maximum utilization limit any consumer should have at somewhere between 30 and 35 percent of the maximum limit on any particular card, and the aggregate limit across all credit card accounts, according to Gregory Taggart of Bankrate. Insufficient utilization occurs when a consumer does not use a credit card account at all, and the issuer declares it dormant.

Effects

High and insufficient credit utilization affect the ratio of credit used to credit available --- a major component of the "amounts owed" category in the Fair Isaac risk model. Maxing out a credit card, for instance, costs up to 45 points on a score of 780. Insufficient utilization does not have a direct negative impact. Instead, it raises utilization and thereby lowers a score. If, for instance, you have $2,000 in credit card debt and a $10,000 total limit, then a card with a $2,000 that goes dormant would raise your utilization from 20 percent to 25 percent, because the limit on dormant cards is not included in credit score calculations.

Considerations

Credit card issuers like both scenarios less than the credit reporting agencies. Consumers who do not use an account cost the issuer maintenance expenses; and people who use too much risk defaulting or declaring bankruptcy. The credit card company might lower the credit limit or close an account that falls into either a high or low utilization category.

Tips

When you receive a rejection for credit because of high utilization, trim your budget to funnel more money into credit card debt. Start with the account that has the highest interest first. Alternatively, you could ask the lender for a limit increase, but this might be a tough sell if you are already close to maxing out the card. If you have insufficient utilization, put a small charge on the card every few months and pay it off immediately --- you do not need to carry a balance for the creditor to report data to the bureaus. You could also have a thin credit profile or insufficient credit history. In this case, you need to add a trade line to your file, such as an auto loan or another credit card.