Luis - From all that I have read on these forums here is a somewhat more complete response (thanks to all the great posters we have!) to your question regarding why you should only use a portion of your credit limit: A good portion of your FICO score has to do with utilization of a credit limit. Utilization is calculated on both an individual card level as well as on all your revolving trade lines put together, with all the results being calculated into the algorithm that makes up your FICO score. The ideal utilization rate is 1 to 9% and results in the best FICO score. Therefore if you have a $500 credit limit and use $45, you are utilizing 9% which is within the ideal range. $40 would be 8%, $35 is 7% and so on. This is calculated when the CCC reports your balance to the CRAs. 1 to 9% utilization shows that you are able to use credit responsibly, yet aren't dependent on it to get by each month. Not using the card at all (0%) doesn't give the companies an idea of how well you can use the credit and then pay it back, so you will see people advise you not to "sock drawer" your credit cards, but instead to use them responsibly each month. I have read and personally experienced that once you reach 25% utilization you usually will experience a drop in your FICO score, and 50% causes an even more significant drop etc...
However, Capital One only reports your highest balance owed instead of your actual credit limit. Therefore the CRA's only have this "high balance" to use when calculating your utilization. You can see how this could hurt you if you only ever used a small amount of the credit on THIS particular card - i.e If you used $50 out of your $500 limit, and Cap One reports this $50 amount as both your high balance and your current balance, then you are seen as being at 100% utilization even though you are actually only at 10%. Even if you payed it off and later only charged $25, you would be seen as being at 50% utilization due to the calculation using your previous high balance of $50. This reporting practice for Cap One is supposed to change later on this year but until (unless?) it does there is a solution that someone spoke of earlier. The basics of that solution is to find a way to utilize most ( a suggested 90 - 95% of your limit is a bit safer than 100%) of your credit limit on your Capital One card and let it get reported to as the "high balance", pay this off in full, and then utilize no more than 9% of that amount in the following months. If during the month you need to use your card for more that this amount for some reason, you should be okay to do that as long as you pay it back down to the 1 to 9% range before the billing cycle ends and before the higher balance reports to the CRAs. Here is a suggestion based on your previous posts: If you are going to purchase a notebook computer, pay for it with part credit and part cash! Then as soon as the credit use (high balance) shows up with the CRAs, pay if off in full with the money you already have saved. Since you already have the cash in savings to pay for it, this would be an ideal way to maximize the high balance that Cap One is reporting and also get your computer equipment. After that it will be simple to buy a tank of gas once a month (or whatever you need), pay it off the next to keep the utilization in an ideal range, avoid finance charges and continue building a credit history. I hope this was helpful.
Message Edited by alixwooten on
07-04-2007 05:13 PMMessage Edited by alixwooten on
07-04-2007 05:13 PM
