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  1. #1

    How a High Credit Utilization Can KILL Your Credit Score

    Your credit score is affected by five factors: your payment history (35%), your credit utilization (30%), credit age (15%), types of credit (10%) and credit inquiries (10%.) As you can see, good credit utilization is one of the major contributing factors to a high credit score. But what is credit utilization and how can high credit utilization hurt you?



    Understanding Credit Utilization

    Credit utilization is simply a ratio of your card balances to the credit limits listed on your report. If you have a $100 balance on a credit card with a $1,000 limit, you're utilizing 10% of your credit. The goal is to have this percentage as low as possible, which demonstrates you're not overwhelmed by your debt or maxing out your credit cards, a huge red flag for creditors. According to FICO, individuals with the highest credit scores have a credit utilization of 7%. Still, this percentage alone isn't all that's used to calculate your score.

    Line Item Utilization. This number tells you the utilization of each revolving credit card you have. For each card you have, divide the balance by the credit limit and multiply by 100 to get your utilization percentage.
    Aggregate Utilization. The aggregate utilization is when you use all of your balances and all of your credit limits to find your debt utilization percentage. Remember, credit cards that don't have a balance still count, as the credit limit is used.

    How High Credit Utilization Hurts You

    A great deal of debt, or a high credit utilization, is one of the biggest ways to lower your credit score, in turn making it more difficult to get new loans or the best interest rates. Usually, you'll notice your credit score begin to go down as you hit the 30% threshold of your credit utilization and --if you frequently max out your credit cards -- you could take a major hit in the Level of Debt category of the credit score calculation. With a high credit utilization, new creditors may see you as a risk and deny you new loans, while existing credit cards may lower or refuse to increase your limit.

    Causes of High Credit Utilization

    There may be a number of things that cause your high credit utilization, including living beyond your means, charging everyday purchases to credit cards without paying the balance, or even something more temporary. As you make charges to your credit card, the balance will be reported to the major credit bureaus. Even if you always pay your credit card balance in full each month, it may sometimes be reported before you have the chance to pay it down, which will temporarily affect your credit score until the credit card company reports a new, lower figure.

    Tips to Reduce Your Utilization

    • Remember, there is no way to trick your score into believing your utilization is low by paying your balance in full each month, as it may not be reported as such. The best way to keep your credit utilization low is to maintain a low credit card balance at all times.
    • Since you never know when your credit card company will report your balance, avoid charging more than 30% of your credit limit whenever possible.
    • If your card issuer reduces your credit limit, this will definitely impact your credit utilization. Take steps immediately to lower the balance, especially if the credit card is closed, which automatically reduces the limit to $0 while your balance may still remain high.
    • Asking to have your credit limit increased for your credit cards can also improve your credit utilization, provided you don't carry a high balance.



    Remember, high credit utilization won't hurt you forever as long as you reduce your credit balances. As you pay down debt and lower your credit balances, you’ll see your debt utilization go down and your credit score slowly climb.

  2. How a High Credit Utilization Can KILL Your Credit Score
  3. #2
    Registered User Junior Member
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    43
    I didn't know the part about when they report the balance. I don't put a lot on my cards anyways but now I definitely won't. This forum is a good resource.

  4. #3
    Registered User Enthusiast
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    64
    Do student loans effect utilization or is it just for actual credit cards?

  5. #4
    Registered User Enthusiast
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    69
    I think its just cards. Mine are pretty much maxed out which is definitely bad.

  6. #5
    Quote Originally Posted by byedebt View Post
    Do student loans effect utilization or is it just for actual credit cards?
    Nope, only revolving credit accounts like credit cards.

  7. #6
    Registered User Enthusiast
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    64
    Quote Originally Posted by CreditDave View Post
    Nope, only revolving credit accounts like credit cards.
    That's definitely good news for me, thanks!

  8. #7
    Registered User Junior Member
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    24
    Maybe I missed it but what % is considered "maxed out" by the credit bureaus? I have a card with a credit limit of $5,000 and a $4,800 balance I would assume that this is considered maxed out?

  9. #8
    Quote Originally Posted by Soccer45 View Post
    Maybe I missed it but what % is considered "maxed out" by the credit bureaus? I have a card with a credit limit of $5,000 and a $4,800 balance I would assume that this is considered maxed out?
    I believe 90% utilization is considered maxed out by the bureaus, so yes your account would technically be considered maxed out.

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