Friday, October 3, 2014


As we now know, 35% of your credit score is based upon your payment history and 30% of your score is based upon your "Credit Utilization."  In other words, your CREDIT CARDS can have a major impact on your credit scores because they have BOTH a payment history AND are the element that generates your credit utilization.  Credit Cards have an impact on 65% of your credit score!
Simply put, credit utilization is the ratio of the amount of credit offered to you vs. the amount you currently use.  If you have a credit card (CC) with a $1000 limit and you carry a balance of $600, you are 60% credit utilization.  Same thing applies to multiple cards, if you have 10 cards with a $1000 limit each, and you carry a balance of $600, you still have a 60% credit utilization.
For a GOOD credit utilization, you want to be at our below 30%.  When you are below 30% utilization, your score gets positive influence from your credit cards (assuming you’re making your payments on time and don’t forget that AGE of accounts does account for 10% of your scores as well).
Now, what is PERFECT credit utilization and how do you get there? 
Common misconception: “I pay off my credit card in full every month so I carry a $0 balance.  That’s perfect right?”  WRONG. 
First of all, the utilization is based upon when your creditor REPORTS to your credit report.  Let’s just say a credit card is due on the 1st and you pay it to $0 on the due date every month.  This does NOT mean your credit report will say $0 balance on this card.  It’s based on WHEN the creditor reports information. 
Example, you pay off this credit card in full every month on the 1st (due date), BUT you have your power bill or cell phone bill – or any number of bills that come out automatically on the 2nd and this creditor reports to the credit bureaus on the 5th of every month.  Those bills that are paid by this account and anything else charged between the 1st and the 5th show up as the “current” balance of the account on the reporting date.
Secondly, Perfect utilization is actually 1%. Why you ask?  Credit reports can’t see that you are paying a debt off constantly.  If you pay it down to $0 every month and it reports $0 every month, the credit scoring model ONLY sees a carrying balance of $0.  If you are DEAD serious about building your credit score, you want to develop a strategy that reports a 1% utilization to your credit!
Credit Cards – Perfectly Utilized:   MOST if not ALL of creditors report to the credit bureaus your account information within 7 days of the due date.  If you want the BEST possible report, pay down your balance to 1% of the line (of some negligible number - $5); then, do NOT USE YOUR CARD FOR 7 days.   You WANT the creditor to report that negligible (1%) balance on their reporting date.  1% Credit Utilization is BEST POSSIBLE ratio for your score AND the credit scoring models can tell that you are constantly using the card and paying back down to PERFECT utilization.  After that 7 day window, you’re safe to again begin using the account as you normally would.

-David Villmow
Director and Sr. Credit Advisor at Credit Management Solutions
(904) 579-4312