It’s
no secret that debts recorded on your credit reports can influence your
credit scores. And, it’s also no secret that your credit score is more
heavily impacted by credit card debt than installment debts, such as
auto loans and mortgages. So how can you best continue to use credit
cards without causing an adverse impact to your credit scores? The
answer is controlling your utilization percentage.
First off,
what is the utilization percentage? The utilization percentage, also
referred to as the debt-to-limit ratio, represents the amount of your
aggregate credit card debt divided by your aggregate credit limits on
your credit card accounts. For example, if you have three credit cards,
each with a $1,000 balance and a $2,000 credit limit, then your
debt-to-limit ratio is 50% because $3,000 divided by $6,000 is 0.5. Add
the balances on the credit card accounts and divide that figure
($3,000) by the sum of the credit limits ($6,000). The lower this
percentage, the better it’s going to be for your scores.
The
million-dollar question that seems to have many answers is, “What is the
highest debt-to-credit limit ratio that won’t lower my credit score?”
The answer to that question, as it is with almost all credit scoring
questions, is “that depends.” VantageScore experts routinely recommend
that consumers keep levels at or below 30 percent, and various articles
advise levels from 10 percent to 50 percent. The optimal ratio always
will be as close to zero percent as possible, but it’s still possible to
have elite credit scores with higher ratios.
One thing to
consider as you’re contemplating the issue of the debt-to-limit ratio is
how the scoring models come to understand your balances and credit
limits. They receive information about your credit card accounts from
your credit reports. So, the balance and limit amounts on your credit
reports are going to be the figures used in the calculation of your
utilization ratios. This is important to keep in mind because some
consumers mistakenly believe the ratio is based on whatever your
balances happen to be at the moment a score is calculated. If you make
an electronic payment today to pay down an outstanding balance, your
lower utilization ratio probably won’t be reflected in a credit score
pulled tomorrow because it takes time for your lender to report the
change in balance to the three major credit reporting companies
(Equifax, Experian and TransUnion) and for that lower balance to be
reflected in your credit report.
If you’re able to control your
usage percentage to the point that you can pick and choose what that
percentage is going to be in any given month, then you probably have the
ability to pay your balance in full rather than carrying a balance from
one month to the next. And, if you are going to pay your balance in
full by the due date, consider instead paying it in full by the statement closing date,
which is the date on which your billing cycle ends, your balance is
determined and your monthly statement is cut. If you time your payments
in this manner on a regular basis, you can maintain a zero balance on
your statement. In addition, because credit card issuers generally
report your statement balance to the credit reporting companies, a zero
balance on your statement should soon equate to a zero balance on your
credit reports, which is fantastic for your credit scores.
You
always should shoot for the lowest utilization percentage that’s
realistic for you. If the best you can manage is 80 percent, at least
it’s better than 90 percent. Hold to that, and strive to get 70 percent,
then 60 percent, and so on. Generally speaking, the people who have the
highest scores have a utilization percentage below 10 percent.
If,
however, you fall in love with any one target percentage, such as 30
percent or 50 percent, you run the risk of shooting either too high or
too low because there is no one magic number that fits everyone. The
presence or absence of other types of credit-related transactions in
your credit file can affect the degree of influence that
percent-utilization has on your score. Of course, sources in the
industry are going to give you a general idea of what that utilization
level should be, but with over 200 million people with scoreable credit
files it’s not as simple as just saying everyone should focus on any one
percentage. That’s simply not realistic. But if you keep your
utilization level at or below 30 percent, as VantageScore recommends,
that percentage will prevent most consumers’ scores from dropping, and
that’s why VantageScore uses it as a guideline.