When you think about maximizing your existing credit to improve your FICO score, credit utilization is a factor you have direct control over. Credit utilization is the ratio of the balances owed on your revolving credit (lines of credit, credit cards) vs. the total overall credit limit you have.
If you have three credit cards with a combined $10,000 total credit limit, and owe $4,500 across all three, your utilization would be 55%. High utilization is ideally defined as owing more than 30% across all accounts.
Your FICO score has an algorithm that takes various factors into play, which include the following:
- Payment history – the percentage of payments you have made on time over the prior two years has a major effect on your report (roughly 33% of your score)
- Derogatory Marks – Any collection accounts, tax liens, judgements, or bankruptcies have a large impact on your score
- Credit Card Utilization – What we are covering today also has a high impact. (roughly 30% of your score)
- Average Age of Credit Accounts – The average age of your open credit accounts. This impacts your score somewhat, however if you control the three factors above this and keep your credit accounts open with no balances and no late payments, this will only benefit you.
- Total number of accounts – Very low impact
- Hard Inquiries – Number of times you have applied for credit. Low impact.
Your utilization is 30 percent of your FICO score, and in most cases is completely within your control. Lenders will consider you a risk if you have maxed all of your revolving credit out. Even if your payments have been made on time every month, and you have no derogatory accounts, you are in danger of not being approved for additional credit if you are carrying balances close to the credit limit. Even if you do get approved, you will pay for it via a much higher annual percentage rate than you would like.
Credit Karma shared the following informative graph on how credit card utilization ultimately effects maximizing your FICO score. As you can see, having 0% utilization is good, however hovering between 1-10% is best.
While we never say you should live your day-to-day life solely to have a perfect FICO score, we do know that for many reasons, you should keep your credit utilization low. The stress of carrying unsecured debt can often have you moving balances to delay paying it off. We always recommend to not carry a balance when you can absolutely avoid it, and consider asking your current credit card issuers for a credit line increase to assist in your utilization ratio. One of our favorite hacks is to plan your payment to right before your card’s statement cuts. You can reach out directly to your credit card issuer and confirm the date they will be reporting your activity. If possible, pay off or pay down as much of your card’s balance a few days prior, and then avoid using.