On CreditKarma.com does 0% utilization = report card of only C?

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JNK
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On CreditKarma.com does 0% utilization = report card of only C?

Postby JNK » Wed Oct 31, 2012 5:41 am

My question is exactly what my thread title says and my situation is this:

My personal credit utilization is VERY low - less than 1% of my total credit line - because I spend little on my cards (right now anyways) and have a decently high overall total credit line to my name.

Because of this CreditKarma.com concluded that my 'Report Card' grade is a C in the category of 'Open Credit Card Utilization'.

... Whut?

So, basically, to get an A (I took a look at the expanded chart), I need to spend MORE on my cards? Does that sound right to everyone?

Also, in that vein, does anyone know how 'correct' CreditKarma is about their 'advice' and 'Report Card'?

I thought I knew credit pretty well, but seeing that C on my Report Card for UNDER-utilizing my given credit is a bit WTF.

I AM charging, just NOT A LOT.

Is there something wrong with that in terms of actual FICO calculations or is CreditKarma wrong? :confused:

I fell a few points in my FICO for no reasons I could fathom, but seeing this on my CK Report Card is making me a bit suspicious and I would love clarification if anyone knows the 'right' answer.
Personal Collection:

AMEX: Everyday (MR), Macy's (cobranded)
MASTER: Citibank Dividend Platinum Select (non-World version)
VISA: Chase Amazon Signature, Chase (bank issued)
GE: Care Credit (medical expenses), Macy's (store), JCP (store)


Business Collection:

AMEX: Costco True Earnings
MASTER: None
VISA: Chase Ink Cash


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djrez4
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Postby djrez4 » Wed Oct 31, 2012 7:52 am

The general consensus is that your best scores will come with between 1-4% utilization. Why that is, I couldn't tell you. I would guess that it's because 0% doesn't show any use and can't build positive history. If you're not using your cards, you can't say you're responsible with them.
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Daniel
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Postby Daniel » Wed Oct 31, 2012 12:29 pm

djrez4 wrote:The general consensus is that your best scores will come with between 1-4% utilization. Why that is, I couldn't tell you. I would guess that it's because 0% doesn't show any use and can't build positive history. If you're not using your cards, you can't say you're responsible with them.


I would like to add to this, In many credit score models, including FICO 08, TransRisk, and Vantage, the optimal range of utilization depends on whether you are trying to keep your existing account, or apply for a new account. If you are trying to apply for a new account, scores are typically maximized by maintaining greater than 5% utilization and less than some number between 20 and 35 percent.

The thinking behind the minimum usage is that, if you are using very little of your available credit now, then the fact that you are applying for more says something about you, like maybe you are going to need to borrow a ton soon, or your income/expenses wouldn't support more credit and spending, and in general is a risk predictor of delinquent accounts and charge offs. Many consumers don't like this line of thinking but from the bank's perspective it is necessary to protect its assets.The thinking behind the upper boundary is much more common sense. If you are using too much now, then you will use too much then and put more dollars at risk for the bank.

However, when looking at scoring for an existing account management perspective, the acceptable range is widened at both ends usually, and is looked at on an individual account basis and not on the aggregate of your personal accounts.

In both cases, having inactive accounts is not good. In general, inactive accounts are on their own just un-profitable but not loss generating. The holders however, tend to use their accounts only when financially stressed, another predictor of delinquent and charged off accounts. So it is common to see limit decreases when utilization stays at 0 for a period of time.

JNK
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Postby JNK » Wed Oct 31, 2012 3:07 pm

That really makes little sense to me in some ways because there are some situations which seem to suggest otherwise (which I explain down below), but okay.

So if I wanted to get an auto loan, for example, I ought to be owing MORE on my credit cards to get a better deal?

If what you said about having more positive credit utilization is the case, then why is there so much talk about having 0 balances when applying for a major loan like a car loan or a mortgage and why is so much of the advice related to having said 0 balances on the accounts when applying? Wouldn't having a zero balance everywhere = 0% credit utilization at the time of the hard credit pull?

Also, I have noticed that when CLIs have been increased for me (on their own, and in one case, I had requested it), they have almost always happened when my accounts were all paid off in full. NOT when I was showing utilization (which was over 5% but definitely less than 30% on any given account including the ones that received the CLI), but when my accounts were paid off.
Personal Collection:

AMEX: Everyday (MR), Macy's (cobranded)
MASTER: Citibank Dividend Platinum Select (non-World version)
VISA: Chase Amazon Signature, Chase (bank issued)
GE: Care Credit (medical expenses), Macy's (store), JCP (store)


Business Collection:

AMEX: Costco True Earnings
MASTER: None
VISA: Chase Ink Cash

Daniel
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Postby Daniel » Thu Nov 01, 2012 12:15 pm

JNK wrote:That really makes little sense to me in some ways because there are some situations which seem to suggest otherwise (which I explain down below), but okay.

So if I wanted to get an auto loan, for example, I ought to be owing MORE on my credit cards to get a better deal?

If what you said about having more positive credit utilization is the case, then why is there so much talk about having 0 balances when applying for a major loan like a car loan or a mortgage and why is so much of the advice related to having said 0 balances on the accounts when applying? Wouldn't having a zero balance everywhere = 0% credit utilization at the time of the hard credit pull?

Also, I have noticed that when CLIs have been increased for me (on their own, and in one case, I had requested it), they have almost always happened when my accounts were all paid off in full. NOT when I was showing utilization (which was over 5% but definitely less than 30% on any given account including the ones that received the CLI), but when my accounts were paid off.


Your post brings up some great questions that are common causes of confusion for us consumers.

First, paying off your balance in full does not show 0% utilization. Your utilization is the amount due on your CC statement monthly, so it is the combination of your carried balance and monthly spending.

Remember that we are talking about maximizing credit scores, not application scores, as each type of application will use different information like types of accounts, income level, debt to income, and other things. Credit scores are typically used as a first level screening before more complex underwriting rules come in to play. To see an example of this, check out Lending Club's rules.
https://www.lendingclub.com/public/how-we-set-interest-rates.action
They clearly use score as just a first level screen (660+ FICO Only) and then adjust for other risk factors.

The reason many mortgage advice posts recommend 0 balances is because mortgages commonly use a debt to income ratio in their screening process, and any balance on CC's counts against this. Remember though that 0 balances does not mean 0 utilization.

Does that help clarify those issues a bit, or is there something I can go into further detail on?

namvet
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Postby namvet » Thu Nov 01, 2012 12:46 pm

My advice is to not pay any attention to CK grades. Utility is important but YMMV on the score impact. Keep your utility at a level you are comfortable with and as long as you always pay on time you should never have a problem. As far a credit line increases go, i have always received them regardless of low, no or high utility. Utility is most important when applying for new credit IMO.

Daniel
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Postby Daniel » Thu Nov 01, 2012 6:10 pm

namvet wrote:My advice is to not pay any attention to CK grades. Utility is important but YMMV on the score impact. Keep your utility at a level you are comfortable with and as long as you always pay on time you should never have a problem. As far a credit line increases go, i have always received them regardless of low, no or high utility. Utility is most important when applying for new credit IMO.


I agree that utility is more important when applying for new credit, and that the grades aren't the be all end all of what you need to do with your credit.



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