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
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