Quick question about credit card utilization

[neatdesign]

I've looked online about this, but have been unable to find a definitive answer. Hopefully someone here can tell me.

In calculating your credit score, is your overall utilization used, or is the utilization on each individual account used?

For instance, let's say I have four credit cards, each with a credit limit of $5000. My total credit limit is therefore $20,000. Now, let's say I have $8000 in credit card debt, with $2000 on each card. In that case, my utilization rate on each card is 40% ($2000/$5000 = 40%). My overall utilization rate is also 40% ($8000/$20,000 = 40%).

But what if the debt isn't equally spread out among my four credit cards?

What if I have $4000 on one card (80% utilization), $2000 on another (40%) and the other $1000 on a third card (20%), with the last card having a $0 balance (and 0% utilization)?

By my calculations, in the second arrangement my overall utilization is only 35%: 80% + 40%+ 20% + 0% = 140%/4 credit cards = 35%

Firstly, am I calculating that correctly? (I've never been stellar with math!)

Secondly, assuming my calculations are correct, it seems to me that having a large balance on one card but smaller (or no) balances on the other cards would help boost one's credit score a bit, if only because the overall utilization is lower. However, if the credit score takes INDIVIDUAL utilizations into account, then the second arrangement would obviously NOT be more advantageous.

I'm asking because I have a BT offer where I can have the bulk of that card's credit limit used up at only 4.9% APR, if I use the offer to pay off some other smaller (but slightly higher APR) cards off.

~ Jenney

[disneysteve]

The problem is in your first example, you've got $8,000 in CC debt, but in your second example, you've only got $7,000 in debt. If you change your second example so that you also have $8,000 in debt, your overall utilization would remain at 40%.

What I don't know is how that alters things. I've always assumed you should keep the utilization on each card at 35% or less, not your overall utilization.

[JoyJoy]

Lenders like to see 30% utilization. I kept mine at 35% for quite awhile and my credit scores went from the low 600's to the mid 700's.

Craig Watts, Public Affairs at FICO, wrote this article in 2005 which helped me a lot with what you're asking Jenney. Hope is helps you as well.

Cracking the credit-scoring algorithm

[poundwise]

The credit utilization score does not care if you have two, $1000 limit cards with a $100 balance each or two, $1000 limit cards with a $200 balance on one and $0 on the other. The ratio is the same.


Note the language in this sentence from Fair Isaac:

"Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)"


The only other thing to note about your score and proportions/ratios, is that there is a calculation based on credit cards (revolving accounts) and the comparison of limits to balances and there is another calculation for installment loans which is based on "proportion of balance to original loan amount."

These are two different account types but both fall under the same portion of your FICO score determination. I only mention it because people are often concerned with their utilization ratio as it applies to their credit cards but fail to regard the other. (For instance, how it is effected by obtaining a loan, such as for a new vehicle.)

[neatdesign]

Thanks to you all for your responses. See, I told you I wasn't great at math!

PW, I'm glad that you mentioned the bit about installment loans, because that actually gets to the heart of what I'm trying to decide to do. In a nutshell, I am trying to determine whether it's better to use this BT offer to paid off/down some credit card balances I have, or if I should use it to pay off two installment loans I have (both consumer loans). Here are my options:

BT Offer
USAA 4.9% fixed BT offer, no BT fee, $18400 available credit

Credit card balances that could be transferred
BofA - $1735 at 10.99% ($7500 CL); this balance will definitely be transferred
Citi Regular - $1450 at 6.99%

Installment loans that could be transferred
Loan #1 - $1810 at 11.15% ($2500 original loan amount)
Loan #2 - $2720 at 11.25% ($3000 original loan amount)

Honestly, I wasn't aware how something like an installment loan would figure into one's credit score calculation, but now that you mention it, it makes sense for them to consider how much was left remaining to be paid off.

So, looking at it from that perspective, would it make more sense for me to transfer the installment loans to my credit card, as their "utilization ratios" are quite high (72% and 91%, respectively)? By using the BT offer to pay off my installment loans, both of those ratios drop to 0%. Meanwhile, once I transfer those two loan balances over to my USAA account, my current overall credit card utilization rate would go from 52% to 58%.

Which is the lesser of two evils?

~ Jenney

[vsjhoc]

For the most optimum effect on your credit scores, keep the utilization on EACH credit card somewhere between 1% - 9% on the day that the card reports to the credit bureaus.

[poundwise]

Originally Posted by vsjhoc

For the most optimum effect on your credit scores, keep the utilization on EACH credit card somewhere between 1% - 9% on the day that the card reports to the credit bureaus.

I don't believe this is accurate. Could you please provide a link or data/rationale supporting this claim?

[Coleroo]

I've always been under the impression that both can affect your score - for years i had Experian's credit monitoring service and scoring tips. The tips I always got back went something like:

Scoring is good because...
"Your overall score is good because of low overall utilization"

You can improve your score...
"Your individual utilization on some cards is near their maximum limit causing your score to be lower"


So, based on that and other material i've read, I've always understood it to mean that if I had 8000 total credit limit (1 card at 4000, 1 card at 2000, 1 card at 1500, and another card with 500 ), it would be better to keep all of them low.... and that my score would be hurt more if I had 1499 balance on card #3 than if I had a 2000 balance on card #1.

Anyway, I could be wrong ...the "both ways can affect you" has just always been in my head.

[vsjhoc]

Originally Posted by poundwise

I don't believe this is accurate. Could you please provide a link or data/rationale supporting this claim?

I don't have a link but got the info from the horse's mouth -- two FICO employees.

[disneysaver]

Originally Posted by Coleroo

I've always been under the impression that both can affect your score

I have read this also - both affect your score in some way.

I wouldn't worry so much about utilization so much - I would pay the highest interest rate debt first!

[poundwise]

It makes sense to keep your credit utilization low on each card but not because each individual card is considered separately as a factor in scoring but each card makes up a PART of the TOTAL which is what this portion of your scoring is based on.

That is, if you have two cards with a $5,000 limit each and no balances and one card with a $10,000 limit that is maxed-out, you are not specifically hurt BECAUSE the one card is maxed-out. However, SINCE that card is maxed out, your total ratio is $10,000 (balances) to $20,000 (combined limit) which is 50% utilization, which is a negative factor.

This is why, I believe you have the cautions concerning the limits on each card. Each card's ratio is not considered separately as a part of scoring. At least not according to any data that I've seen. What matters is the proportion of TOTAL balances reported to TOTAL limit available. Period. HOWEVER, if one card is askew, that CAN tilt the whole ratio and, yes, that can reflect quite poorly on this portion of the calculations that go into your score.

However, it can also be that one card can be askew and not have a detrimental effect overall.

Take the same cards from my hypothetical example above. Let's say that one of the $5,000 cards is maxed-out and the other two cards have no balance. Now your total ratio is $5,000 to $20,000 or 25%. That is much better than the former scenario of 50% though in both cases you have two cards with a zero balance and one that is maxed-out.


Let me add this as well - Not as a "how the FICO calculations work" comment but as a personal view; I believe that you shouldn't carry a balance on any one card of any more than 20-25% at any given time. This ensures you always maintain an overall ratio of less than 20-25% (hopefully more like 10%) and keeps you from looking overextended no matter how you, or anyone else, looks at it.

Of course, I also believe that people obsess way too much about their FICO score and get into a lot of games that may or may not matter regarding it. Be responsible. Don't overextend. Don't seek lots of new credit. Pay your bills on time. That's really what is at the core of maintaining a good credit history and having a good score.


I would also point out that much of the scoring method (and madness) is shrouded in mystery. People do things that conventional wisdom says that they shouldn't only to see their score rise and people do things that ought to help raise their score only to see it rise in the short-term and then fall again. Like I said, just go about your business wisely and, yes, be aware of your score and the major factors that contribute to it, but don't sweat it too much.

[vsjhoc]

I still maintain that the score evaluates your total balances in relation to your total available credit on revolving/charge accounts, as well as on individual revolving/charge accounts.

I agree with you that we should take a reasonable approach by paying on time, not getting overextended, not requesting too many cards, and not getting too crazed about scores.

[JoyJoy]

The 1% - 9% utilization is stressed at the myFICO - FICO Credit Scores | Get a Free Credit Report Online forums by the administrators/moderators there.

IMHO, I am of the belief that too much credence is given to obtaining perfect FICO scores. I understand the importance of credit scores, however, to me it has become an obsession for many people.

I agree with paying your bills on time, limiting the number of cards that you have and plain old common sense about not spending tomorrow's income today is still wise advice to follow.

[neatdesign]

Thanks for the follow-up responses. Sorry, but it's impossible at this moment in time (or even in the foreseeable future) for us to have 1%-9% utilization ratios. Or even less than 30%, or even 40%. The only way around that would be to jack up our credit limits and/or open more credit card accounts, neither of which I really want to do.

We pay all of our bills on time and typically pay way more than the minimum required. We pay as much as we can. That said, we have little left over to put into savings, which is something I'd like to change. This is a good BT offer (4.9F for the life of the BT balance) so I want to take advantage of it. I just don't know if I should use the available credit to pay off credit card debt or our installment loans. I can't use the BT offer to pay off all of them, unfortunately. We've only another week to make a decision.

~ Jenney

~ Jenney

[disneysteve]

Originally Posted by neatdesign

I just don't know if I should use the available credit to pay off credit card debt or our installment loans.

Pay off whichever has the higher interest rate.

[JoyJoy]

Well you can always have the best of both worlds.....

Pay off BOA @ 10.99% and Loan #2 @ 11.25%

I wouldn't obsess over this too much longer! Make a decision and go on with your life! 4.9% for the life of the balance is much lower than the other interest rates you have quoted. Me...I would have consolidated them all when I first got the offer of 4.9%. If I had waited then I would be confused as to what to do next!! 3 of the bills at the least I would put under the 4.9% and leave the lowest of 6.99 to pay separately.

Good luck!!!!!!!!!!!!!!!!!!

[poundwise]

Originally Posted by vsjhoc

I still maintain that the score evaluates... individual revolving/charge accounts.

Ok.

Originally Posted by JoyJoy

The 1% - 9% utilization is stressed at the myFICO forums by the administrators/moderators there.

Gotcha.

Originally Posted by disneysteve

Pay off whichever has the higher interest rate.

True that.

Originally Posted by JoyJoy

I wouldn't obsess over this too much longer! Make a decision and go on with your life!

Amen.

[neatdesign]

Ok, it's done! I wrote a 4.9% BT check and deposited it to our bank account. Once it posted, I paid off our two loans and our BofA credit card (average APR: 11.5%). So now, although we still have a lot of debt, the average APR for all of our accounts combined is 5.5%!!!

Not only that, but our monthly payments have dropped as a result of this consolidation. We're going to take the extra amount that we would have paid -- about $150/month -- and put it towards savings.

Thanks for all of your advice, I really do appreciate it!

~ Jenney

[disneysteve]

Originally Posted by neatdesign

We're going to take the extra amount that we would have paid -- about $150/month -- and put it towards savings.

Consider a slightly different plan. Don't put it all toward savings. Put $50 toward extra payments on the debt. You'll accelerate your repayment plan quite a bit.

[neatdesign]

Thanks, Steve. I should have clarified that we always pay well above the minimum, and we break up the payment into weekly chunks. That way, over the course of 12 months, we squeeze in an extra month's payment without even noticing it.

~ Jenney