The Truth About the 20% Rule

In matters of credit, everyone has their own way of doing things. Some carry huge balances and pay their minimum balances. Others avoid credit except in emergencies, paying off small balances immediately. Both are extreme cases and neither is ideal. Unfortunately, in the case of credit, there’s very little clear information and education for credit card holders, it can be hard to create a best practice. One common piece of credit advice is “The 20% Rule,” which states that you should only be using 20% of your available credit at a time. But is it true? Well, mostly…

How Much Is Too Much?

There’s debate about whether using 20% of your available credit is too high or too low. Keeping too high of a balance on your card can, of course, adversely affect your credit score. Some insist that that “acceptable number” is as high as 30%, others as low as 10%. The truth is, a 20% balance is a good, consistent ceiling for your credit limit. Meaning that if you have a $5,000 limit, carrying a balance of no more than $1000 month to month is a good way to ensure your credit score stays safe and high. Any ongoing balance over 20% is generally considered too high by banks and can adversely affect your credit score.

Lower Is ALWAYS Better

There is a bit of superstition and misinformation around whether it’s “better” to keep a small balance of some specific amount on your credit card—it’s not. If you can pay your balance in full, or get it below 10% every month, then do that. That will save you money in interest payments while still allowing you to build your credit. One simple way to maintain a low balance is to calculate one or more monthly bills to be automatically deducted from your card to equal 10% of your usage. So if you have a $2000 limit, you can keep your cards on file for $200 worth of monthly expenses—your cell phone company and Netflix subscription might do it! Pay that off every month and save yourself some worry.