Is Zero Credit Utilization Hurting Your Credit Score?

There is a widespread belief in credit scoring that maintaining zero credit utilization is the ultimate recipe for a stellar credit score. It's an appealing concept indicating financial responsibility and a clean slate.

However, before jumping to conclusions, it's crucial to delve deeper into the intricate relationship between credit utilization and your credit score. To fully comprehend and appreciate the impact of the credit utilization ratio on your credit score, it is important to understand what it entails, how it operates, and how it affects your credit score.

Understanding the complex interplay between credit utilization and credit scores is essential in today's financial landscape. The decisions you make regarding your credit can have far-reaching consequences on your ability to secure loans, mortgages, and favorable interest rates.

In this informative blog, we will embark on a comprehensive exploration of the impact of credit utilization on your credit score. We'll shed light on the often-misunderstood notion of zero credit utilization and address the question: "Is it good to have zero credit utilization?"

What is Credit Utilization Ratio?

The Credit Utilization Ratio, also known as the Debt-to-Credit Ratio, is a measure that compares the amount of credit you have used to the total credit available to you. It is expressed as a percentage and is an important factor in calculating your credit score.

Lenders and credit scoring models consider a lower credit utilization ratio favorable, indicating responsible credit management and a lower risk of defaulting on payments. On the other hand, a high credit utilization ratio suggests that you are heavily reliant on credit and may face financial difficulties, increasing the risk of late or missed payments.

As you accumulate expenses on your credit cards in addition to any existing outstanding loans, your credit utilization ratio increases correspondingly. And while a one-off higher utilization rate does not impact your credit score, consistently high credit utilization harms your credit score.

To calculate your credit utilization ratio, divide your total credit card balances or outstanding loan amounts by your available credit limit. Then you can put these values in a simple formula to get your credit utilization ratio.

Credit Utilization Ratio= (Total Outstanding Amount)/(Total Available Credit) ×100

For example, if you have a total credit limit of INR 2,00,000 and the amount of your outstanding balances is INR 88,000, your credit utilization ratio would be:

88000/200000 ×100 =44%

How Credit Utilization Affects Your Credit Score

Numerous studies have indicated that individuals tend to spend more when using credit cards as opposed to debit cards or cash.

It is common for people to struggle with the temptation to maximize their credit cards and utilize their entire credit limit, especially when they believe they are getting a favorable deal or encountering a bargain. However, such excessive credit card usage not only leads to a recurring cycle of unnecessary shopping and debt but also has negative repercussions on both credit scores and creditworthiness.

Your credit utilization ratio provides lenders with an indication of how prudently you utilize your available credit limit and manage your debts. It is crucial to assess your creditworthiness, and it significantly affects your credit score calculation. A high credit utilization ratio reflects a credit-hungry mindset, which lenders perceive as financially risky behavior. Such high utilization suggests a potential inability to manage finances effectively, leading to a lower credit score.

On the other hand, maintaining a low credit utilization ratio, ideally below 30%, is generally seen as positive for your credit score. It indicates responsible credit management and the ability to live within your means.

Credit utilization is calculated both on an individual account basis and as an overall ratio of all your credit accounts. It's recommended to keep the utilization low on separate accounts as well as maintain a low overall credit utilization ratio.

The impact of credit utilization on your credit score can vary based on other factors such as payment history, length of credit history, and mix of credit accounts. However, it is generally advisable to keep your credit utilization as low as possible to maintain a good credit score.

What is a Good Credit Utilization Ratio?

Now that you have grasped the concept of a credit utilization ratio, its calculation, and its impact on your credit score, the subsequent query arises: how to maintain a favorable credit utilization ratio?

A commonly recommended guideline is to maintain your credit utilization below 30 percent.This guideline applies to both individual credit cards and your overall credit utilization ratio. Going above this range can lower your credit score, as lenders may perceive it as a sign of excessive reliance on credit.

However, it's important to note that occasionally exceeding 30% utilization on a specific card does not automatically result in negative consequences for your credit score. The impact on your credit score becomes more significant if consistently high utilization is observed over a certain period, suggesting a recurring pattern of credit dependence.

Is it Good to Have Zero Credit Utilization?

Lenders and credit bureaus consider low credit utilization ratios to be good indicators of the borrower being in control of their finances and not spending recklessly beyond their means.

However, achieving a credit utilization ratio of zero is not necessarily beneficial, as it can indicate that you are not actively using credit. Contrary to popular belief, this may not be the best strategy to improve your credit score and establish your creditworthiness to potential lenders.

Some credit scoring models may even interpret a zero ratio as a lack of credit history, which can potentially result in a lower credit score.

Some of the reasons it may not be beneficial to have a zero-credit utilization ratio are:

  • With zero credit utilization, lenders and credit bureaus have access to limited or no credit history, which leads to difficulties in credit history assessment and evaluation of your creditworthiness.
  • Using your credit cards responsibly allows you to build your credit history, demonstrate your creditworthiness, and improve your credit score. Focusing on the zero-credit utilization strategy means you miss the opportunity to demonstrate responsible credit use.

Additionally, having zero credit utilization can also have other drawbacks, such as:

  • Limited access to credit options during emergencies as lenders may hesitate to offer credit without recent credit activity and history.
  • Negative impact on credit applications due to a lack of demonstrated credit history and track record of responsible credit usage.
  • Difficulty building a strong credit profile and maintaining financial health for future goals.

So, it is evident that relying on zero credit utilization is not a prudent strategy when aiming to build a strong credit profile, establish creditworthiness, and enhance your credit score. But if you want to sustain a low credit utilization ratio, here are a few habits to maintain a healthy credit score:

  • Clear any high outstanding amounts from your credit cards to lower your credit utilization.
  • Make more frequent credit card payments. For instance, consider paying off your credit card balance every 10 days instead of waiting for the monthly statement. This practice replenishes your credit limit regularly, lowering visible credit utilization rates.
  • Use multiple credit cards for different transactions instead of relying on a single card. This helps maintain a lower credit utilization rate across all cards, avoiding high utilization on one card and low utilization on others.
  • Do not close old credit cards but keep them active with small purchases. Closing old credit cards will reduce your total available credit and increase your credit utilization ratio.


In conclusion, while it may seem counterintuitive, having zero credit utilization is not necessarily beneficial for your credit score. While maintaining a low credit utilization ratio is generally recommended, avoiding credit utilization can hurt your creditworthiness.

Lenders and credit scoring models consider a demonstrated ability to manage credit a positive factor. Therefore, it is advisable to use credit wisely, keeping the utilization ratio low but not at zero. By understanding the role of credit utilization and practicing responsible credit management, you can build a stronger credit profile and improve your overall credit score.