Lesson #2 : How to pay your credit card correctly – CREDIT CARD UTILIZATION

There are five major factors that influence your credit score. The level of debt/credit utilization is 30% of your score. Credit utilization has a big influence on your credit score

Credit utilization is the ratio of your credit card balances to credit limits.

It measures the amount of your credit limit that’s being used. For example, if your balance is $300 and your credit limit is $1,000, then your credit utilization for that credit card is 30%.

To calculate your credit utilization simply divide your credit card balance by your credit limit then multiply by 100. The lower your credit utilization, the better. A low credit utilization shows you’re only using a small amount of the credit that’s been loaned to you.

Your credit score – including your credit utilization – is calculated based on the information on your credit report. Because credit card information is updated on your credit report based on billing cycles and not real time, your credit score may not reflect the most recent changes to your credit card balance and credit limit. Instead, the balance and credit limit as of your credit card account statement closing date are what’s used to calculate your credit score.

The FICO scoring model looks at your credit utilization in two parts. First, it scores the credit utilization for each of your credit cards separately. Then, it calculates your overall credit utilization, that is, the total of all your credit card balances compared to your total credit limits.

A high credit utilization in either category can hurt your credit score.

So if you transfer all of your credit to a SINGLE card and MAX it out due to trying to get a lower interest for your balance you are raising the utilization on that card and effecting your credit score also.

If you have say 4 Cards such as these for example.

Victoria Sec. $250
Chase $1000
Koles $500
NFCU $3500

You have 5 credit utilization ratios you have to watch at all times..

Victoria Sec. $250 ($25)
Chase $1000 ($100)
Koles $500 ($50)
NFCU $3500 ($350)

Each card should never go past their statement date with more than this amount for a 10% util rate. The total util of $525 should never be changed on all of the cards at once on statement date to report a 10% rate.

This is why you see people wanting very high limits on a card. It greatly increased how much they can HOLD on a card and not max the best UTIl rate for FICO. If I got a 5th card with a $10K limit, I can now technically MAX all 4 of my small cards out and be under 10% TOTAL UTIL. I would take a small hit for each card being maxed but my main util radio would be great.

Where Credit Karma and FICO differ is the way they look at your utilization and is why they will almost never show the same score. You see your CK score move just because you had a small balance change on 1 card for instance. Credit utilization is 23% of the VantageScore not 30%, but the score also considers your balances as 15% and available credit as 7% of its score something FICO does not do. In total, the amount of your credit card debt affects 45% of your VantageScore instead of just 30% like your FICO score.

You can’t trick the FICO score into thinking your credit utilization is low by paying your balance in full at the end of each month. If your balance is high when your issuer sends your account information to the credit bureaus, this is your statement date, then the credit utilization used in your credit score will also be high.

Fortunately, you can maintain a low credit utilization by keeping a low credit card balance – below 30% of your credit limit is great. 10% is perfect, and 3% is excellent for the most effect on your FICO score.

To ensure your credit report reflects a low credit card balance, make sure your balance is low by your account statement closing date (the date your billing cycle ends).

If, for some reason, your card issuer cuts your credit limit, it’s important to reduce your credit card balance to lower your credit utilization for the new limit. This is especially true if your lower credit limit is at or near your credit card balance.

An example of practical application is as follows. We will use the same card as before.

Credit Limit $500 (could be more)
1: Statement/Closing Date Jan 5th
2. Due Date: Jan 30

Same rewards card. You can go for rewards or not. This process gets you a 10% utilization at the same time reported. All that changes is what you do at the statement date.

Dec 6th-30th: Spend as much of the Available credit that you can manage.

Jan 4th Pay the card back to the most desired effect on your credit. 29% ($145) will give you a normal score bump, 9% ($45) will give your a great FICO Score boost. 3% ($15) will give you a perfect score boost reported to CBs with a good utilization on the 5th

To avoid interest charges you have until Jan 30th to pay off the balance. Now what some do not understand is if you leave a balance after statement date, say the $145, and you charge again right away, even if you make payments all the time before the next statement date, if you never get that first $145 back to zero before the 30th you are going to pay interest. The Balance HAS to be brought to ZERO at least after the statement date to keep from paying a interest past the 30th.

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