The Often Overlooked Credit Score Factor

Credit card utilization is the relationship between the balances on your credit cards and the credit limits on all of your open credit card accounts.  It is expressed as a percentage and is calculated a number of ways.  It’s critically important to your credit score, as it is a key factor in the “Debt” category of your credit score. 

The debt category is worth 30% of your FICO® * score points and while the credit card utilization percentage isn’t alone worth all 30% (that’s a myth), it’s certainly key to earning and maintaining great credit scores. FICO, by the way, is the "gold standard" of credit scores.

*FICO is a registered trademark of Fair Isaac Corporation. 

Line Item Utilization – Calculate This First

The first way to calculate your credit card utilization is by doing so for each one of your cards.  So, go grab each and every one of your credit cards, retail store cards and gasoline cards and make a stack.  As long as they have revolving terms, meaning you don’t have to pay them in full each month, they need to be in your pile.

Each of those cards has a credit limit, which is the highest amount that can be charged on that card.  You can find the limit by looking at a statement or by calling the credit card issuer.  Or, you can look at your credit report.  Getting the limits from your credit reports is the most important method (because that’s how credit scores calculate utilization) but they aren’t 100% accurate 100% of the time.

For every card that has a balance (meaning you got a bill this month), divide that balance by the credit limit.  Then multiply that figure by 100 and you’ll get the utilization percentage on that card.  So, if you have a $50 balance and a $500 credit limit you’ll get 10%.  Your goal is to have the lowest possible percentages.

Now, you’re going to be tempted to cheat.  Just because you already did or plan to pay the balance in full doesn’t mean your percentage is 0.  Credit scores can’t tell what your intentions are and as long as the balance is showing up on your credit report then you will have a utilization percentage greater than 0.

NOTE: Sometimes credit limits don’t show up on credit reports.  This is what I was referring to earlier about it not being accurate 100% of the time.  If your report has missing credit limits on open credit card accounts then you’re not out of the woods.  Look for the field called “High Balance” and use that figure in lieu of the missing credit limit.  The high balance is the historical highest balance on that account.

Aggregate Utilization – Calculate This Next

The method for calculating aggregate utilization is exactly the same as it was for line item utilization except for one difference.  You’ll need to add together all of the balances on your credit cards and all of the credit limits as well.  Then you’ll divide the aggregate balance by the aggregate limit.

Now, it’s important you do this right.  Just because you have a credit card that doesn’t have a balance doesn’t mean it won’t count here.  You’ll still include the credit limit, which will help your percentage.  This is the number one reason you don’t want to close credit card accounts even if you don’t use (or want) the card any longer.  The unused limit helps your utilization percentage.

Examples of Utilization - Individual and Average

Here is the formula for Utilization Ratio:

Credit Balance ÷ Credit Limit = Utilization Ratio

The best way to explain this formula are using some examples…

Example 1:

Credit card limit is $1000, and your balance is $500

500 ÷ 1000 = .5 or 50% = Utilization is 50%

Example 2:

Assume you have a credit limit is $1000, and your balance is $150

150 ÷ 1000 = .15 or 15% = Utilization is 15%

Example 3:

Assume you have 3 credit cards, and each credit card has a credit limit of $1000.

Card A: Balance of -0-  = Utilization is 0%

Card B: Balance of $100 = Utilization is 10%

Card C: Balance of $1000 = Utilization is 100%

Average Utilization

Your credit score is affected by both your individual credit card utilization and average utilization (all cards). Here is what would the average utilization for all three credit cards, A, B, and C if you were to use "Example 3" above:

Step One: Add each credit balance and come up with a total number:

0 + $100 + $1000 = $1100 = Total Credit Card Balance of All Three Cards   

Step Two: Add each credit limit and come up with a total number:

$1000 + $1000 + $1000 = $3000 = Total Credit Limit of All Three Cards

Step Three: Divide the total credit card balance by the credit limit of all three cards:

$1100 ÷ $3000 = .36 or 36% = Average Utilization is 36% (for all three cards)

RULE: Keep your reported average utilization ratio at 9% or lower if you are looking to maximize your FICO score.

However, if you keep average utilization at 28% or lower, you’re doing very well.  

Example 4:

Here is an example of really, really good utilization:

If you have 3 credit cards, and each credit card has a credit limit of $1000.

Card A: Balance of $70 = Utilization is 7%

Card B: Balance of $90 = Utilization is 9%

Card C: Balance of $80 = Utilization is 8%

$240 ÷ $3000 = .008 or 8% = Average Utilization is 8%

Example 5:

Another example of really, really good utilization:

If you have 3 credit cards, and each credit card has a credit limit of $1000.

Card A: Balance of -0-  = Utilization is 0%

Card B: Balance of -0-  = Utilization is 0%

Card C: Balance of $240  =  Utilization is 24%

$240 ÷ $3000 = .008 or 8% =  Average Utilization is 8%

In the above example the average utilization is 8%, which is good!

However, it’s still not quite as good as Example 4 because in Example 5 you have one card which is above the optimum utilization ratio of 9%.

What Utilization Percentage Should You Aim For?

According to FICO, the consumers who have the highest scores in the country (760 and above) have an aggregate utilization of 7% to 9%.  The FICO score is designed to reward consumers for having a lower rather than higher utilization.  So, generally, the lower the number the more points you’re going to earn in your score.  30% is better than 50%, but not as good as 9%.

With each and every client we represent, we show them a proven system to quickly boost their credit score. Tax problems often trash credit scores, so it's important our clients get back on the right track so they can pay less, buy property, and enjoy life.

Call us Toll Free at: (800) 659 0525.  

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