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Credit Advice and Tips on Credit Utilization

Mark Cappel
UpdatedJun 19, 2009
Key Takeaways:
  • Learn what credit utilization means.
  • Avoid maxing out any individual credit line.
  • Understand how a credit score is calculated.

Can you answer my questions on Credit Utilization?

  1. For credit cards, is utilization measured on the debt to available credit at statement close or any time during the month? I will make a large purchase that will utilize 46% of my available credit on a single card (single purchase so I can not split among cards), but plat to pay off electronically within 2 days of posting to my credit card and well before statement close.
  2. Is my FICO score based on total utilization across all cards or on each card or both? I've read different statements. Across all cards my utilization would only be 15%.
  3. Does my mortgage factor into utilization? I heard your credit is better as you pay down loans (ratio of debt to original balance gets better), Does that mean you get dinged if you refinance a mortgage since the amount owed is the same or close to the amount of the loan right after refinancing?

Thank you for your detailed question about credit utilization.

All of your questions refer to credit scoring and specifically to credit utilization. I will answer your questions and then share some general advice on credit scoring.

What is Credit Utilization?

First: Utilization is measured at the close date (typically monthly) and then reported to the bureaus. A reporting period is typically 90 days, so a charge and then quick payoff should not hurt your credit utilization.

Second: FICO, the main credit scoring system, measures utilization at the individual card level (and possibly in aggregate). Be aware that if you have an individual credit line or credit card that has a balance that is more than 33% of the credit limit, this could negatively impact you. If you have a maxed out card, this will certainly hurt you.

Thirdly: There is no concept of utilization on an installment loan or primary mortgage, that we are aware of. If you payoff credit lines or credit cards by refinancing your mortgage, this could likely benefit your utilization ratios, since the cards are paid to zero and their utilization is low. Also, in terms of payment history, a mortgage payment has the most weight. Remaining current with your mortgage payments will continue to help your credit score.

How a Credit Score is Calculated

As you are inquiring about credit scores, let me give you some information on how it is calculated. It is important to understand how your credit score is calculated, so you can take the proper steps to protect and improve your score. Your credit rating is calculated based on five variables, including:

1) Payment History

Payment history, which counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

2) Credit utilization

Total debt and total available credit, which counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.

3) Length of Time of Accounts Have Been Active

Length of positive credit history, which counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments. If you have accounts with long history (5 or more years) and no missed payments, you should keep these open and paid off.

4) Variety of Accounts

Mix of types of credit, which counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.

5) The Number of Accounts Opened Recently

The number of new credit applications you have recently completed, which accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.

To learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered at the credit resource page.

I hope this information helps you Find. Learn & Save.