What Keeps Some Consumers Stuck in Bad Credit

Credit cards and other loans can serve as a lifeline, when making ends meet may seem out of reach during times of financial hardship. Unfortunately, relying too much on these types of loans can actually damage already poor credit, and recent data indicates that this kind of problem could be getting worse.

New data from credit bureau Experian shows that consumers with average to poor credit are spending more of their available credit. Looking at data from the last quarter of 2014 and the last quarter of 2013, consumers in all credit levels increased the amount of money they spent on their cards, relative to their credit limits. Since credit scores are determined in part by the amount of available credit in use, this trend could spell trouble for people with already weak credit scores.

Credit limits can be tricky, because even if you have up to $1,000 to spend on a single card, that doesn’t mean you should. Having a card balance close to your limit can damage your credit standing. It’s called credit utilization — how much you use of your available credit — and it’s the second most influential aspect of your credit score (payment history is first).

Keeping your credit utilization low isn’t always as easy as it sounds. Using less than 30% of your available credit — or better yet, less than 10% — is a good guideline for utilization, but when your credit limit is $1,000, or even or $500, keeping your utilization low can be a challenge.

People with bad credit who have credit cards often have very low credit limits, so to keep their credit utilization low, they have to be careful about how they use their cards. For example, if someone with very poor credit, between 300 and 499 on the VantageScore 3.0 scale, has a $500 credit limit she should only spend $150 on it before paying it off to keep her utilization at 30% or lower, in order to help her credit score. If the consumer really wanted to work on her credit, she might want to only spend $50, to keep her utilization at 10% or lower.

Many people in that situation, however, aren’t doing that, according to Experian’s data, which indicated that people with the lowest credit scores had nearly maxed out their available credit in the last quarter of 2014. Even those with fair credit didn’t do a great job of keeping their debt levels low: The average utilization rate for mid-tier credit card users was well over half the limit. The average credit utilization rate across the board was 20%, but here’s how the data breaks down by credit level:

Super prime (781 to 850 VantageScore 3.0)
Average credit utilization in Q4 2014: 5.7%

Prime (661 to 780)
Average credit utilization: 27.5%

Near prime (601 to 660)
Average credit utilization: 63.7%

Subprime (500 to 600)
Average credit utilization: 76.7%

Deep subprime (300 to 499)
Average credit utilization: 95.6%

That gap between near prime and prime consumers is huge. Of course, it’s a lot easier to keep your credit utilization down when you’re approved for a high credit limit, as people with super prime credit scores generally are. At the same time, lowering your credit utilization is one of the easiest ways to improve your credit score, so if you have poor credit, it’s something you can focus on.

First, you have to know your credit limits and pay attention to your spending. If you have a very low limit but you prefer to use the card for frequent transactions, consider paying off the card multiple times a billing period to keep utilization low. Once your credit improves, you may be able to qualify for a higher limit. As you work to improve your utilization and your credit standing as a whole, you should check your credit regularly and make sure your information is properly reported to the credit bureaus. You can get a free summary of your credit report every 30 days on Credit.com to track your progress.