Credit is complicated and there are many different factors that go into the scoring. Payment history only accounts for up to 35% of what goes into your score. “Credit Utilization” can account for almost just as much as paying your bills on time at 30%.
An important note to remember is credit scores were developed to help the banks determine how much of a Risk you are to lend money to. So the second largest (30%) factor in helping the banks determine your risk factor is “Credit Utilization”, which is simply referring to your balances in relation to their limits on revolving accounts.
They have developed certain thresholds to help them determine your risk as it relays to balances on your revolving accounts.
Those thresholds that affect Credit Score follow;
No Data- If you don’t ever carry a balance they have nothing to report so there is “No Data” being submitted to your credit reports.
Perfect Ratio -Consistently carrying a balance in this range will maximize your credit utilization factor.
Good Ratio- This is considered acceptable and will get you a good positive rating.
Neutral Ratio – You are getting closing to becoming a “Risk” so you will not get hurt here but you won’t get rewarded either.
Bad Ratio – Once you break this threshold you are becoming more of a risk and the closer you get to 100% or Maxed Out levels the more of a risk you become and the more your scores will be negatively affected.
How to determine your “Credit Utilization” is very simple, just take your balance and divide it by your limit.
Example: Your have a $387 balance on a $1000 limit credit card. You are 38.7% utilized on this account.
While Credit Utilization is a large factor that can negatively impact your scores, another important note to remember is your credit score is a snapshot of what is on your credit at the time a report or scores have been requested. Meaning it is very simply to fix this issue.
Your final utilization score is based on an aggregated total of all of your accounts. Sometime it is easier to pay your balances down, sometimes it might be easier to increase the limits on existing accounts.
The goal here is to bring your utilization percentages into an acceptable range. Increasing old limits could require a new inquiry to be placed on the report and the length of history could also be affected. But in this game of percentages, inquiries and history hold a MUCH lower % than Credit Utilization with regard to credit scores. Getting your utilization in line at the expense of a new inquiry or account can be well worth it.
Credit Utilization is a constant battle, and is something that always needs attention. It is not something that can be reviewed once a year and addressed then.