Question about Credit Card Utilization Rate

[Anonymous]

I've read that a good credit utilization rate is 30% or lower. My question is how and when is this rate calculated?

For example, I just received my first credit card - it has a $1,000 credit limit. Let's say I charge $300 to this card, this would be considered 30% utilization. But what if I paid off this balance before the credit card statement cutoff date. Would I now have a 0% utilization rate since the statement I receive would show $300 in charges along with the $300 payment I made mid-month? Or is it still 30% utilization?

Any input would be greatly appreciated! Thanks!

[ferrari]

0%. The outstanding balance on your statement is what gets reported to the CBs.

And the common knowledge here is that <9% is the optimal utilization for scoring. Keep in mind that utilization is rounded up so it has to be exactly 9 or less.

Your score is calculated based on a snap shot of your CR meaning that utilization only affects your score for one month. Once you pay down your balances your score will go back up to the maximum it can be. My point is you don't need to worry about paying before statement date unless you are applying for something and you need to optimize your score.

Also, for optimal score you need to have 1 or 2 cards only reporting a balance <9% and the rest reporting 0%.

[Anonymous]

Thanks for the quick response and helpful info.

One more question - I understand that paying off the balance before the statement date isn't necessary but let's say I charge $300 on my $1000 credit limit and pay it off in the middle of the month. Does my limit go back to $1,000 or is it $700 until the next period?

[Anonymous]

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@Anonymous wrote:

I've read that a good credit utilization rate is 30% or lower. My question is how and when is this rate calculated?

For example, I just received my first credit card - it has a $1,000 credit limit. Let's say I charge $300 to this card, this would be considered 30% utilization. But what if I paid off this balance before the credit card statement cutoff date. Would I now have a 0% utilization rate since the statement I receive would show $300 in charges along with the $300 payment I made mid-month? Or is it still 30% utilization?

Any input would be greatly appreciated! Thanks!

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Hi NKYWildcate & welcome to the FICO Forums!

A good place to get your answers (and more) is right here: The Son of Credit Scoring 101

Excerpted:  To figure utilization: Balance (divided) by Credit Limit = percentage. Lower than 10% recommended per account, this is one of the fastest means for increasing the over all credit score.

[ferrari]

Whenever you make a payment and it posts, that payment will be added to your available credit limit and you'll be able to use it so yes it goes back to 1000. But some issuers only allow a certain number of payments to be made every month.

Plus, some don't let you make a payment until the statement posts. The way around this is to PUSH the payment using your bank's billpay.

[DI]

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@Anonymous wrote:

Thanks for the quick response and helpful info.

One more question - I understand that paying off the balance before the statement date isn't necessary but let's say I charge $300 on my $1000 credit limit and pay it off in the middle of the month. Does my limit go back to $1,000 or is it $700 until the next period?

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Normally It goes back to $1000 when the payment post.

[Anonymous]

I have never had a late payment, foreclosure, repossession, judgment, bankruptcy or the like.  Until about a year ago, my credit utilization rate was always low, and my FICO score was anywhere from 780 to 805, depending on the agency.  However, in the past year, I maxed out my credit cards to finance a renovation of my home.  (Don't ask; it's a long, sad story.)  Last I looked, my score was at 640.  With the construction project nearing completion, I'd like to refinance and pay off the credit card debt but, of course, that's proving challenging given my score.  So I'm thinking about taking a short-term loan from a relative to pay off the credit cards and raise my score so I can refi.  Once I've refied, I can pay off that short-term loan.  I'd like to be able to assure the relative that the loan will, in fact, be short-term.

 It stands to reason that, as you say, if I pay those balances off, my score should go back up immediately.  But are you sure there's no "memory" in the scoring formula that will cause a time lag in the recovery of the score?  is there any way I can get a definitive answer to this question?  I don't want to borrow from a relative and pay off the credit cards, only to find out that it's going to take many months for the score to recover.

And a related point:  To what percentage do I have to reduce my utilization rate in order to get my score above the (apparently) magical level of 720?  And does the dollar amount of either the balances or the credit limit (as distinct from the utilization rate, which is the ratio of those two) have an impact on the score?

[bs6054]

Things can be a little different with a Refi, in that the file gets a closer scrutiny.   Your score should indeed go up as utilization goes down, but your file will show the  "High Limit" on your cards, showing that once they were nearly maxed out.   I don't know if this will really matter, and you have an good explanation.  Hopefully someone here or in the mortgage section will know more.

[Anonymous]

Thanks for that.  As you can tell, I'm new to this forum and to trying to figure out how FICO scores work.  Is the actual scoring formula made available anywhere?  I'm guessing not.  If not, then are we more or less reduced to trying to reverse engineer the formula based on our collective experiences?