Most common questions about credit utilization, answered

Credit utilization (the amount of credit you’re using compared to the amount of credit you have available) is important, to be sure. In fact, it’s the second-most important aspect of your FICO score, the credit score most often used by lenders: On the chart below (from FICO’s website), utilization is represented by the “amounts owed” slice of the pie.FICO components pie chart utillization

But before you start fixating on utilization, make sure you’re not falling for any myths – and that you’re not wasting any effort. We asked FICO Spokesman Anthony Sprauve some of the most common questions that come up in our forum about utilization.

What’s the ideal credit utilization percentage?

Calculating credit utilization is simple: Just divide the amount of credit you’re using by the amount you have available. If, for example, you have $1,000 in credit and are using $500 of it, your utilization is at 50 percent.

But if you start researching what the ideal credit utilization is, the numbers go haywire. You’ll see 30 percent quoted often as the line you don’t want to pass. Other sources recommend staying under 10 percent.

FICO itself emphasizes the 30 percent ceiling, Sprauve says, but the lower, the better.

“Thirty percent is what we quote because that’s what’s most realistic for people to maintain,” he says. “You’ll get good marks at 30 percent, better marks at 20 percent and even better marks at 10 percent. But you’ll do just fine at 30 percent.”

What if your overall utilization is low, but you’re maxing out one card?

Let’s say you’re maintaining a nice, safe 30 percent utilization across all your cards but nearing the limit on one of them.

More about FICO scores

If so, you’ll be penalized in FICO’s scoring model, Sprauve says, because it looks at utilization across your cards and on a per-card basis.

“Maybe your overall utilization looks good, but if you have one account where you’re above that 30 percent threshold, you’ll get dinged for that one account,” he says.

Will past high utilization hurt you if you pay your balance down to zero?

Say your credit utilization has been high for years, but you recently wiped out all your debt. Do you have a clean slate as far as utilization goes?

A long history of negative behavior (including high utilization) won’t put you on equal FICO footing with someone who has always carried low balances, according to Sprauve. At least not right away.

“If you have a history of keeping your balances low and doing all the right things, you’re going to have a better score than someone who has had high balances in the past and struggled with keeping their balances down,” Sprauve says.

The good news: “The further in the rearview mirror negative things like high balances are, the less impact they have on your score,” Sprauve says.

How do charge cards factor into utilization?

Some cards, such as charge cards, don’t have credit limits. In exchange for more charging flexibility, you must pay in full every month. Such cards are ignored by the utilization aspect of FICO’s model.

“If you have an account like that, it does not count into utilization,” Sprauve says. “Utilization is looking at revolving credit.”

Some cards, though are less clear-cut, boasting “no pre-set spending limit.” You have an official limit, but you’re allowed to exceed it in certain circumstances. Whether those cards are factored into utilization, “really depends on how the credit card company is actually reporting the card to the credit bureaus,” Sprauve says. “And while they are telling the consumer one thing, they may be reporting it differently.”Credit limit on credit report

The only way to be sure is to check your credit reports. In the details for that card, check to see if a credit limit is reported (see the example from an Experian report on the right).

“If you look at your credit report and the card is reporting with a limit, it’s being included in utilization, and if it’s not being reported with a limit, it’s not being included in utilization,” Sprauve says.

When is the balance reported to the bureaus?

Your utilization is determined by the balance your issuer reports to the credit bureaus. The question is when, exactly, your balance is being reported. Many consumers may assume that the balance on their statement is what reports, but Sprauve warns that isn’t necessarily true — and that can be a problem if you’re using a particular card a lot and running up high balances.

“If they’re reporting when your balance is really high, your utilization is going to look really high, even if you pay the card off every month,” says Sprauve.

Sprauve therefore recommends paying the card off halfway through the month, continuing to use the card and then making another payment when you get your statement. Or you might set up an alert to notify you when your balance hits, say, 25 percent of your credit limit and make a payment at that point.

“Rather than going crazy trying to figure out when a card is reporting, if you’re using the card a lot, just get into the habit of paying off the balance more than once throughout the month,” Sprauve says.

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