Published February 28, 2013
Here's an axiom familiar to borrowers: Using too much of your available credit hurts your credit score. A personal finance rule of thumb that goes with it says that for a good credit score, keep your "credit utilization ratio" -- what you use versus how much you have to use -- below 30%. The rule applies to each card individually, and to the cumulative limits of all your cards.
So if you have a card line with a $10,000 limit, for the best credit score, don't carry a balance higher than $3,000. Simple, right?
Sorry, but no. Your credit limit has fewer hard-and-fast rules than personal finance bromides would have you think. Knowing its tricks can get you a better credit score and keep money in your pocket.
Forget the old 30% idea
Start by throwing out the old notion about 30% usage being OK. FICO, the company that originated credit scoring and is still the largest provider of such scores, has long advised score-conscious consumers to be far more stingy about credit use. The company had told people to keep it to 10% or less, says Anthony Sprauve, spokesman for myFico.com, FICO's consumer website.
More recently, the company's stance has softened he says. Its studies indicate that there is only a minimal score difference between consumers who limit their usage to less than 20% and those who keep it to less than 10%, he says.
That can be good news for consumers who want to actually use lower-limit credit cards for more than token purchases.
According to FICO surveys, credit scoring "high achievers -- those with a score north of 750 -- they're using an average of 7% of their available credit," Sprauve says. "I think 20%, for a lot of people, is more realistic. I would rather talk about that as a realistic goal that they can attain, rather than something that might feel like a stretch and out of reach."
And remember that credit scoring formulas are closer to a sliding scale than a cliff. You don't go from a great score at 20% credit utilization to a lousy one at 21%. "There's no hard-and-fast guideline," Sprauve says. "But I think that if people stay somewhere between 10 and 20% range, that's a good place to be."
It's still true that you shouldn't go rack up debt on any one card. The FICO scoring system looks at "the total available credit and the total balance used," says Sprauve. "But it also does look at individual lines of credit. So it factors in both."
FICO, VantageScore differences
FICO's chief alternative, the VantageScore, is a bit more lenient in how it views utilization ratios. FICO counts credit usage as 30% of its overall score. In the VantageScore universe, the ratio makes up about 23% of the score, says Sarah Davies, senior vice president of research and analytics for VantageScore Solutions.
To keep it strong, aim for using less than half of your available credit lines, says Davies.
"If you keep your balance below 50%, your score is not negatively affected," she says. And keeping it "below 30%" is smart, she adds. And, as with the FICO models, the lower your utilization (above 0), the more benefit your score can see, she says. Also, as with FICO, how much a change in the utilization rate affects the score will vary by person, depending on their individual credit history.
If you like VantageScore's attitude toward credit usage better, that's nice, but you don't get to pick which score lenders use. VantageScore is used by less than 10% of the lending market, says Craig Focardi, research director for the TowerGroup.
Maximizing your credit score
Want to keep that score as high as possible while still using your cards? Here are four ways:
1. Use a card that doesn't report utilization ratios. Some true charge cards (cards where the full balance is due every month) don't report card balances to the credit bureaus. The best way to find out if yours does: Call the card issuer, says Sprauve. And if your card doesn't report monthly card charges, you don't have to worry that using more of your credit line will affect your score, he says.
2. Time your payment. You can appear to be carrying a balance, even if you're not. That's because card issuers report your balance owed to the credit bureaus on the same day every month, says Norm Magnuson, vice president of public affairs for the Consumer Data Industry Association, a trade association for credit reporting companies. That day probably isn't your payment due date.
Think of it as a monthly snapshot of your credit use. You want to look as pretty as possible to the credit bureaus on that day. If you're carrying a $2,000 balance on the 10th of the month, when the snapshot is taken, it doesn't matter if you pay it off on the due date on the 15th. The report to the credit bureau will say you were using a chunk of your credit, and that may blemish your score.
The solution: Find out what that day is, and pay any portion over your target usage amount before then. Phone the issuer and ask, "When do you send down that accounts receivable tape to the credit bureau?" says Magnuson. "I don't see why they'd have a problem with answering that. It's a straightforward question."
3. Pay your bill several times a month. Want to make certain you're always under your usage goal while still getting the most out of your cards? Try making payments weekly or twice a month. That will always suppress your balance, no matter when the credit bureau snapshot is taken.
But be careful: If you pay before the statement date, it could be counted as part of a different billing cycle, says Paul Westen, president and CEO of TCM Bank, the card issuer for many community and independent banks. You could still have a bill due in a few weeks, he says.
The smart move: Call first and find out how the billing department handles multiple monthly payments, along with what information you need to include when you pay.
4. Request a credit line increase. If you use a set amount every month and want that amount to equal 10 or 20% of your credit line, one way to make the math work is to increase the credit line, says Westen. "Creditors no longer give automatic credit line increases," he says. Instead, the onus is on the consumer to ask for more credit.
Utilization ratios aside, if you're paying that balance on time and in full "every month for a period of time, most issuers will have you at the most attractive rate," says Westen. If they don't, then switch cards, he advises.