Available Credit Limit & Credit Score

When they say "available credit" on your credit report, do they mean the TOTAL (for all credit cards) or for just one account?

When they say "available credit" on your credit score, do they mean that having TOTAL (from all credit cards) of available credit or just available credit on 1 credit card. For example, they say that how much available credit you have is based on how much credit you have left. If i have a card with $4,500 limit and i have $4,000 on it and i have three other cards that have $3,000-3,500 limits but no balance on those, does that balance out, or does that one $4,500 limit credit card make my credit score bad even though in total I have over $8,000 available credit.

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Bill's Answer
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The single greatest factor keeping your credit score low is your amounts owed. The amounts you owe especially on unsecured debts such as revolving credit cards is probably the biggest thing affecting your credit score negatively. The amount you owe in relation to your total available credit is converted to a percentage.

For instance if you have five credit cards total and each one has a credit limit of $10,000, your total available credit on all cards is $50,000. Now let us say you owe a total of $40,000 on all of them together your credit utilization is 80%. Generally, the further you get above 60% debt to credit ratio the more points you lose off your score.

Many experts believe a 20-30% credit utilization is best, but there is controversy on this point. Even Fair Isaac & Co., the creator of the FICO credit score, is inconsistent in its public statements regarding at what point credit utilization passes from good to bad to severe score damage. Experience tells me that at 100% a score suffers seriously. If you pay down your amounts owed to bring your credit utilization factor down to 50% it will probably raise your credit score 50+ points. And if however you are in a position to pay down all your amounts owed to a 0% factor your credit score will go up about 100 points or more!

Two factors are taken into consideration when calculating credit utilization. The first is overall utilization. This is calculated by adding together the balances of all of the revolving accounts, then adding together all of the credit limits, and finally dividing the balance by the limit.

Let us look at a simple overall utilization example using sample data:

Tradeline Balance Limit Utilization
Credit Card No. 1 $300 $500 60%
Credit Card No. 2 $100 $300 30%
Credit Card No. 3 $500 $1,000 50%
Total Utilization $900 $1,800 50%

In the credit score business, a credit account such as a charge card or auto loan is called a tradeline. In the example above, the owner of these three accounts has a 50% overall credit utilization, which is neither in the good territory nor the bad. The credit scoring models do not stop just at overall credit utilization.

Individual credit account utilization is also taken into account when calculating credit utilization. In the example above, the individual account utilizations vary from 30% to 60%. The 60% utilization is likely harming the this credit score because even if overall credit utilization is under 30%, an account above 30% will drag down a score.

Payment history is the No. 1 component in a credit score, and accounts for 35% of a score. Credit utilization is the No. 2 variable and makes up 30% of a credit score.

Therefore, if you pay all of your tradelines 100% of the time, keeping your credit utilization down is the top variable in your credit score. It is also the hardest thing to keep in check for many of us. We are bombarded with messages that happiness and satisfaction is a simple card-swipe away. We buy things we know we don't need and can't afford on credit thinking all we have to do is make the minimum payment next month.

For more information on credit scores please visit our credit resources page.

I hope the information provided helps you Find. Learn. Save.

Best,

Bill

bills.com

5 Comments

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  • 35x35
    Dec, 2010
    Elizabeth: My answer above is vague regarding where the amount of utilization crosses the lines from being positive, to neutral, to negative. That was on purpose. Fair Isaac & Co.'s statements regarding credit utilization have been vague and contradictory. It would be wonderful if Fair Isaac & Co. would hold a press conference or publish a white paper to answer once and for all where the lines are. My guess — note that word choice — is the lines from good to fair to bad vary by length of credit history, number address changes, and location in the US. The reason Fair Isaac & Co. has not set a percentage is that there in no magic, one-size-fits-all threshold.

    Regarding your question, I simply do not know the answer. I would appreciate it if you would return here three months or so after you knock down your credit utilization and let us know what effect it had on your score.
    0 Votes

  • 35x35
    May, 2009
    Bill
    Credit utilization is just one of the factors that contributes to your overall score, for which payment history is also a consideration. A high level of utilization is perceived as risky behavior just because this is an unsecured account and an open ended debt. This is how the bureaus weigh the associated risk, and we cannot change that. The company that extended that credit will also be looking at the overall utilization and will adjust the customers limits accordingly.
    0 Votes

    • 35x35
      Dec, 2010
      elizabeth
      I owe more than 70% on my three credit cards combined and have a credit score in the 700's. I am working on bringing them down to about 10% over the next two months. About how much should my credit score change?
      0 Votes

  • 35x35
    May, 2009
    vivek
    Sir/madam, i want to know how does a high utilization rate should decrease the credit score.A person might have a high utilisation rate of say 80%, but if he is able to pay back on time,then why his credit score be affected.Also, from the company's point of view,how should then the credit score or the given credit limit to the customer be adjusted. Thanks and Regards, Vivek
    0 Votes

  • 35x35
    Dec, 2008
    Betty
    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often. Betty
    0 Votes