Credit utilization ratio question

[nitemarecooper]

I am fully aware that having a high credit limit available will hurt your application for any new credit, loan, mortgage, etc. Having a high balance will also hurt your application, this too is not disputable.

However, I have a question I hope someone can answer, although given the confidential nature of the fico score formula, I doubt anyone can give a definite answer.

While dropping your credit limit will hurt your credit score, due to the increased utilization ratio, most examples given are going from 30% to 60% ratio or perhaps 40% to 80%. However, does it really make a difference to your fico score if the limit decrease will drive an already high ratio even higher in the name of decreasing your overall limit because of planning for the future? For example, utilization ratio currently high at 60-70% being increased to 90% or more?

Any ideas? Thanks in advance.

[Bob B.]

I'm not sure I can answer your specific question. What I can tell you is that last October, my credit score was 580. The low score was due mainly to the fact that I had missed some payments. I was as late as 120 days on one of my (at that time 5) cards. I'd also had two of those cards closed out at the issuers request. So, my utilization was (and still is) extremely high.

What I did was begin making regular payments on debt. Each month. Minimums on lower interest rate, and all the extra I could squeeze out of my monthly income on the highest rate card. It really helped that we had some renters move into a house we have for sale, and they paid their rent regularly.

Well, after 11 months of on-time payments, my credit score has improved to 667. I still have a long way to go towards my goal of 750+, but all in all a lot of progress, and I didn't play any games, I just paid my bills on time.

Good Luck!

[JoshuaHeckathorn]

I would take high available credit over high balances any day. Next to payment history, credit utilization has the greatest effect on your FICO scores, and my best educated guess would be that the worse your CU ratio gets the more it hurts your FICO scores, regardless of how high your CU ratio already is.

Why would you want to decrease your credit limits anyway? I would try to keep anything you can get these days.

[danieldroga]

You can seek for a legal advice to help you out on your problem.You haven't mention on what country are you in.

[BMEPhDinCO]

I am fully aware that having a high credit limit available will hurt your application for any new credit, loan, mortgage, etc. Having a high balance will also hurt your application, this too is not disputable.

However, I have a question I hope someone can answer, although given the confidential nature of the fico score formula, I doubt anyone can give a definite answer.

While dropping your credit limit will hurt your credit score, due to the increased utilization ratio, most examples given are going from 30% to 60% ratio or perhaps 40% to 80%. However, does it really make a difference to your fico score if the limit decrease will drive an already high ratio even higher in the name of decreasing your overall limit because of planning for the future? For example, utilization ratio currently high at 60-70% being increased to 90% or more?

Any ideas? Thanks in advance.

A high credit limit does NOT hurt your application. Having a high BALANCE will though. Don't drop your credit limit unless you don't trust yourself. And yes, a ratio at 70% now that goes to 90% will drop your score. You should be reducing the amount, not adding and every 10% does change the score (At least, that's what people who've done it say...I keep mine below 5%).

If you are having problems paying off your card, you can post and we can help with that but there is no reason to drop your limit and there is no reason to apply for a new loan with a huge amount of CC debt.

[NuggetBrain]

So if you're one of those people who charges everything to your credit card each month for rewards and then pays it off, do they care what the utilization was over the course of the month or do they only look at what the utilization is at during the due date, when it's reported to the credit folks? If you have a rewards CC with a limit of 5k, and you spend 4.5k every month on it but pay it off before the interest hits, won't that mess up your credit score because of the high utilization?

[JoshuaHeckathorn]

So if you're one of those people who charges everything to your credit card each month for rewards and then pays it off, do they care what the utilization was over the course of the month or do they only look at what the utilization is at during the due date, when it's reported to the credit folks? If you have a rewards CC with a limit of 5k, and you spend 4.5k every month on it but pay it off before the interest hits, won't that mess up your credit score because of the high utilization?

Credit-scoring models use the information that's reported on your credit reports, and credit issuers report your balance to the credit bureaus once a month when your statement ends. If you spent $4.5K but then completely paid it off prior to the end of your statement, a $0 balance would likely be reported to the credit bureaus. The credit-scoring models wouldn't care that you spent nearly 100% of your available credit that month.

[Banimal]

Credit-scoring models use the information that's reported on your credit reports, and credit issuers report your balance to the credit bureaus once a month when your statement ends. If you spent $4.5K but then completely paid it off prior to the end of your statement, a $0 balance would likely be reported to the credit bureaus. The credit-scoring models wouldn't care that you spent nearly 100% of your available credit that month.

This is what I do and it doesn't affect my score, aside from keeping it higher than lower. The credit card companies don't disclose your statement just the closing statement balance.

A couple of times I ran my credit card to almost the max (I had to fix my car and buy plane tickets) to get the rewards and just paid it off before the statement closed. I checked my credit report after all my statements closed and it showed a low balance and it didn't hurt my scores.

[nitemarecooper]

Good point, country matters

You can seek for a legal advice to help you out on your problem.You haven't mention on what country are you in.

Didn't think about that obvious point. Thanks. I am in Canada so most such laws are the same as USA. I currently have fairly high credit utilization ratio now and am working hard to pay them off. My highest interest debt at 19.99% should be gone in about 2-3 months. Then after that my car loan is the next highest at 8.??% Not quite sure but I know it is less than 9% for certain. I am just thinking about the ratio more for curiosity as I was led to believe from a bank rep before that if you apply for a loan, mortgage, etc than all revolving credit accounts are automatically assumed to be at max limit when they consider your application.

I am not considering applying for any loan or anything now but likely will sometime after paying off my current car loan and keep it for another year or more paying my car payment into an account for down payment on next replacement. I also plan to buy a house or condo sometime within 3-7 years time frame.

Thanks to all who answered. I guess leave the limits as they are and just pay off balances is the best bet especially in the short term.