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  1. #1
    Registered User Junior Member

    What is optimal credit utilization

    So I know that I should carry a small balance... but how much?

    My wife's score dropped because she let her only card with a balance report $0. So whats the best way? She has a Discover it, Chase Freedom, and a few store cards she never uses. Also which card should she use for this? Just one or switch them around?

    Right now, we are trying to build up our credit scores so we can qualify for a home loan. Each point counts!

  2. What is optimal credit utilization
  3. #2
    Registered User Semi Pro Member
    Last time I looked at this, you wanted to utilize about 10% of your available credit to peak your score. But you only need to do this just in advance of your application.

  4. #3
    Registered User Senior Member
    My experience have been that the best way to prove the UTI portion of my score is that I will let one card report a small balance of less than 10% of it limit. All my other cards will report $0 balance. I let the same card report each month - you don't need to switch between cards.

    Do not do this every single month - just in the month or two before looking for a large bump in credit - like a mortgage application or car loan. And for lowest cost results, you may want to be doing this on a card with a 0% APR offer.

  5. #4
    Registered User Semi Pro Member
    I don't think you need to run a balance on your cards - and incur the interest charges - to help raise your credit score. I think that utilizing only a portion of the credit available to you and paying in full by the due date will get the same or better results.

    If you do want to show a balance you are paying on, taking advantage of an interest free offer. But, once again, I don't think this is necessary.

    If you take Joanne's advice, and it is right, then so-called credit scores have the perverse effect of encouraging debt - even when not necessary.

  6. #5
    Registered User Senior Member
    I agree with Jasero. You want to show credit usage. This does not mean you need to carry a balance. Just that you use your credit cards (instead of saying only paying in cash or by debit card) - especially if you have no other credit/loans.

    From what I've read, the FICO credit scoring models want to see some credit use every month. If you show no use - which is what I am assuming happened to the OP - expect to see a score drop of 20 to 30 points.

    There is good news, though. With revolving card utilization, there is no memory. Just use the card, and your score will rebound. Because the score is regenerated each month based on utilization.

    So my advice is to actually put charges on all your cards periodically (at least once every 3 to 4 months) to keep them from going inactive. You don't want to run the risk of a credit line decrease or even account closure if a card is not used for more than 6 months.

    By doing this, you will build a strong credit history and profile.

  7. #6
    I want to start off by making sure everyone is clear that you do not need to carry a balance to show credit card utilization. Just using your card every month and paying the balance in full is enough activity to show utilization.

    This is because credit card issuers report the balance as of your last statement date. So a zero balance for credit scoring purposes means you did not use that card in the last 30 days, not that you pay your card in full each month.

    In effect, your utilization rate will fluctuate monthly - barring some eerily consistent spending.

    With that behind us, let me turn to the three components of your credit card utilization. This is important because credit utilization makes up 30% of your score (with payment history making up 35%, length of credit history making up 15%, credit mix making up 10%, and extent of new credit making up the final 10%).

    Aggregate Credit Card Utilization

    Aggregate credit utilization is exactly what it sounds like, a ration of the combined balance on all your credit cards, divided by the combined credit limit on all those cards.

    This factor carries the most weight in determining your score for credit utilization. Most experts suggest keeping this ratio under 10%, or even under 5% for the best results. That being said, you may not be going for an 800+ credit score. I think us ordinary folk can still have excellent credit and show about 30% utilization.

    Individual Card Utilization

    My experience and understanding is that this factor is less important. In other words, you do not need to keep the utilization of each card below 10% - you just need to look at your aggregate utilization.

    But if you have a card that you max out - usually defined as greater than 90% utilization - you can find yourself losing points for that.

    To play it safe, try to limit utilization of any one card to no more than 30%, and combine that with an aggregate 10% utilization to the absolute best results. (But I don't think 30% utilization across the board is the end of the world either. It is a bit like an exam of minimal competency. If your other factors are good, and you just want to make sure utilization is not out of whack, showing a slighter higher utilization will not be the end of the world.)

    And remember - this part of your score changes every month. So you really just want to put yourself in the best position when applying for new credit, and not over-think it the rest of the time. (Hey, I've been known to max out a card to take advantage of a unique rewards opportunity, and then pay that balance off immediately. No harm, no foul.)

    Number of Cards Reporting a Non-Zero Balance

    Some commentators say that the peak your score, you might just want to limit use to one card, and let the others show a zero balance. Frankly, I do not know how much this will help, but I doubt it will hurt. (Frankly, I have a "main" cards, and the others often have a zero balance.)

    But my caveat here is to make sure you use that cards every once and a while, or else they may end up being closed due to inactivity. And this may due some damage to your score in the short term.

    A couple of final notes:

    First: this is more art than science. Just understand that debt levels matter, and that is what credit utilization is trying to help measure.

    Second: paying your bills on time matters a lot too. Low credit utilization does nothing for you if you are constantly late or missing payments.

    Okay - this ended up being moire long winded that I anticipated. But I hope it helps.

  8. #7
    Registered User Semi Pro Member
    CD: Thanks for dispelling the myth about carrying a balance helping to show credit utilization.

  9. #8
    It never hurts to remind people of this post:

    Check it out.

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