The Relationship Between Credit Scores and Utilization Ratios
If you're seeking to keep your credit score in good standing, it's a good idea to keep track of your credit card activity. No matter your credit score, how often you use your cards and the balance you carry on those cards impacts your Fair Isaac Credit Organization (FICO) score.
The official term for this is: credit utilization ratio.
What's Credit Card Utilization?
Credit card utilization is the ratio of your credit balance to your available credit limit. When you apply for lines of credit — including automobile financing, mortgages, and other credit cards — lenders use your credit utilization ratio to determine your risk factor level.
Is There a Perfect Credit Utilization Score?
Although there's no perfect utilization rate, John Ulzheimer on Mint.com states: "The way the scores are designed rewards consumers for having a lower rather than higher utilization." This means the lower your utilization score, the better.
Varying Credit Utilization Rates
Since your credit utilization ratio is simply a snapshot at a given point in time, it can be difficult for you to accurately calculate its effect on your credit score. One way your ratio might vary between low and high is the timing of your current credit card payments as related to the timeframe of when your creditors report your balances to the bureaus. Because there is no one set time that creditors report your balances, you cannot determine if the creditors will submit a mid-cycle balance, instead of your paid-in-full balance. This can cause your ratio to vary between low and high.
Answers about Credit Card Utilization and Your Credit Score
In a question and answer post on this subject at NJ.com, certified financial planner Lisa McKnight shares some insights including:
"Having high balances throughout the month, even if you pay them off, can still hurt your credit utilization and credit score," says McKnight. "Utilization isn't the only factor lenders look at for you, as a borrower. They'll examine your past payment history and want to see that you are making regular payments on all your debts. A single missed payment can lower your credit score. They look at your current debts and your debt ratio."
Your Credit Score: There's More to Consider
Although your credit utilization rate is an important factor in the FICO score recipe, there are other elements to consider. In a chart shown on Bankrate.com, it highlights that your credit utilization rate accounts for 30% of your credit score. The remaining 70%, which are all important factors in determining your creditworthiness, includes:
- Payment history: How you pay, when you pay and the consistency of your payments all impact this category. This is the largest category accounting for 35% of your total score.
- Length of credit history: The length of your credit history, both good and bad, impacts this category. It comprises 15% of your overall credit score.
- New credit: This category holds your requests, approvals, and denials for new credit cards, loans, and other financing attempts. This represents 10% of your total credit score.
- Types of credit used: Not everyone only uses credit cards — if you have a home mortgage or finance a vehicle, you have different types of credit under your responsibility. This category represents 10% of the entire score.
If you're looking for more information on the relationship between your credit card utilization rate and your credit score, look at the additional resources in our credit library.
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