While the underlying algorithms of credit scoring models are shrouded in mystery, the broader pillars are well understood, including credit utilization, which measures the amount of debt you're carrying in relation to your total available credit. Credit utilization is an important factor in improving your credit score, as it accounts for 30% of your total FICO score.
In the previously recorded Facebook Live video segment below, Motley Fool analysts Michael Douglass and Nathan Hamilton answer a user-submitted question about how much debt cardholders need to carry to land a higher credit score.
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Michael Douglass:First off, what is a goodcreditutilization percentage to show? Pete, I think yourfirst question is,what are you using it for?Your credit scoreparticularly matters when you're trying to take on debt of some kind. If you'retrying to buy a car,a home loan, that'swhen this really starts coming into play. Theconventional wisdom youusually see you around the internet is,you want to be under 30%. We actually tend to gomore conservative. We tend to say 10% or 15%.Nathan Hamilton: Yeah. You canactually go down to 0% by charging and paying off your balance every month, because what happens with your creditutilization ratio is your balance is reported on the statement date,not the due date of your payment. If you pay off your balance before the statement date, $0 is going to bereported to the credit reporting bureaus. Then,from there, you have the best possible credit score from it. You don't need toactually have creditutilization. You don't need to report 20% or 30% tohave a good credit score. As you mentioned, typically, to have a goodcredit score, or at least not be penalized bytoo high of a utilization,you have to be below 30%. But there's no reasonyou can't be at 0%. The lower you go, the better