Utilization & Credit?

[Anonymous]

So I am new and just got my first CC and wondering how does that work?

I just got my first CC with 500 limit. Can I buy something for like 150 and pay it off like the next day, and then would my limit be reduced by that 150 untill the cycle ends, or would it would go back to 500 right after I pay it? And lets say I get something again for 100, and then wait for the bill to come in, and pay that off by the due date, would it show as combined of $150-30% and 100-20% = 50% utliziation or would only the 20% that is due show for that cycle?

Thanks,

[Anonymous]

My comments below in blue.

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@Anonymous wrote:

So I am new and just got my first CC and wondering how does that work?

I just got my first CC with 500 limit. Can I buy something for like 150 and pay it off like the next day, and then would my limit be reduced by that 150 untill the cycle ends, or would it would go back to 500 right after I pay it?

It will go back up to $500 once your payment goes through.  That likely will not be the same day as you make the payment.  It might take a couple business days.

And lets say I get something again for 100, and then wait for the bill to come in, and pay that off by the due date, would it show as combined of $150-30% and 100-20% = 50% utliziation or would only the 20% that is due show for that cycle?

You would have a 20% utilization.  That's because utilization is calculated based on what is reported.  The credit card company (CCC) reported the amount on your statement to the three bureaus.  That amount was $100.  Therefore (in your example) you would have a 20% utilization until the CCC reported again, typically the day after your next statement prints.

Note: a small minority of CCCs do not report the day after the statement prints.  They might report on the 1st (say) for all of their customers.  And the amount they report could be your balance as of the 1st.  Most CCCs, however, report the amount owed at the top of your statement and do so 1-3 business days after the statement prints.  You can look at your credit reports and that will tell you how your CCC does it.

One of the things all this means is that YOU are in charge of how much your utilization is.  You can use your card quite a lot, but if you want to keep your reported utilization low (and you should want to) just pay it down to a small amount a week before the statement prints.  Regardless, always pay the amount owed on the statement in full before the due date (roughly 24 days after the statement prints).

Thanks,

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[Anonymous]

+1 to everything CreditGuyInDixie said.

I'd add that you should be able to view your credit card account online and see exactly how much credit you have available.

So, in your example, if you start with a $500 limit, as soon as you make the $150 purchase, you'll see your available credit reduced to $350. If you make a payment of $150 the following day, it'll take a day or two for it to post after they receive it, and then you'll see your available credit back at $500.

I had a relatively small credit limit on my Amazon.com store card during this past December. I paid the card down to zero every week during December so that I could keep using it. Over the course of the month, I put almost twice the value of the card's limit on the card (although never more than the whole limit at any given time). But I paid it down completely again before the statement closed, and the card reported $0.00 for 0% utilization to the Credit Reporting Agencies.

[Anonymous]

Awesome! I understand Thank you both!!

[takeshi74]

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@Anonymous wrote:

I just got my first CC with 500 limit. Can I buy something for like 150 and pay it off like the next day, and then would my limit be reduced by that 150 untill the cycle ends, or would it would go back to 500 right after I pay it?

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Your limit doesn't change with usage.  Your available credit does.  When your payment clears and posts it will free up more available credit.  As for how long it would take for that to happen -- it depends on the creditor.  Some are faster than others.

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@Anonymous wrote:

And lets say I get something again for 100, and then wait for the bill to come in, and pay that off by the due date, would it show as combined of $150-30% and 100-20% = 50% utliziation or would only the 20% that is due show for that cycle?

Your card will report the balance on the report date.  While most cards report on statement date there are some that do not.  US Bank cards, for example, report on the last business day of the month.

Your example does not tell us when your card reports.  If it has a balance of $100 on report date then it will report $100.

[Anonymous]

I had another question about multiple cards and utilization.

How does it work with 2, 3, ect, cards? is it per card, or do they combine them together?

For example, I have 2 cc right now, and lets say I use one and it shows 5 percent, and then use the other one and also use it to 5 percent. Would I be at 5 percent utilization, or would it be a combined of the 2 cards for 10 percent utilization?

Thanks,

[Thomas_Thumb]

If you have multiple cards there are two components to utilization:

1) Individual card utilization (card balance/card credit limit)

2) Aggregate (total) utilization across all open accounts (total of balances reported/total of credit limits).

These calculations are point in time. Aggregate utilization can vary throughout a month as CCC report balances and payments. As mentioned above, utilization is a ratio of reported balance(s) to credit limit(s). If you pay your card(s) down to zero before balances are reported your utilization will be 0%.

From a Fico credit score perspective, you do want to allow some balance to report on a card and then PIF the balance.

Here are a couple 2 card examples [card A has a $500 CL and card B has a $1000 CL):

Case I - 30 day cycle

 - Card A charge $200, pay balance; charge $350, pay $250 => statement cuts and reports $100 => PIF the $100 [card UT = 20%]

 - Card B charge $100, pay balance, charge $600, pay balance, charge $400 pay $400=> statement cuts and reports $0 [card UT = 0%]

-  aggregate revolving UT = $100/($500 + $1000) = 6.67%

Case II - 30 day cycle

- Card A charge $200, pay balance; charge $350, pay $350, charge $25 and it slips through => statement cuts and reports $25 => PIF the $25 [card UT = 5%]

- Card B charge $100, pay balance, charge $600, pay balance, charge $400 pay $250 => statement cuts and reports $150 [card UT = 15%]

- Aggregate revolving UT = ($25 + $150)/($500 + $1000) = 11.7%

Aggregate utilization should be maintained under 9% to maximize Fico score. This factor carries more weight in Fico scoring than does individual card utilization. If you only have one card then aggregate UT is the same as the card UT. In the above examples the aggregate UT of 11.7% will ding score more so than 20% utilization and 15% utilization on individual cards. 

Remember credit limits are fixed numbers but, available credit fluctuates as you increase/decrease card balances. The scoring factors used in Fico and most other credit scoring models look at reported balances relative to established credit limits. Side note: closed credit card accounts are not considered in these calculations.

[Anonymous]

Thank you I think I get it!

Basically, I have to keep less 9% reporting between both cards when statements cuts right?

[Thomas_Thumb]

Correct, for best results aggregate utilization should be kept under 9%.

Now... onto one of the finer points of Fico scoring. The Fico models also look at # of open CC accounts reporting a non zero balance. You need to have at least one card report a balance to punch the "I use credit ticket". However, if you allow multiple cards report a balance Fico may ding you score.

I frankly don't worry about reporting a balance on one card only. If you want to rotate through your cards (I have 6 myself) trying to time things so that only one will report a non zero amount is, well, non value added for me. I am more concerned about using cards periodically to avoid a potential adverse action due to inactivity. That being said, if you need a few added points for a new credit application I'd dropping to only one card reporting for the 2 months prior to your application. For example, if you had 3 or 4 cards and reported small balances on all of them, dropping to only one reported may add 15 points to your score ... particularly if your cards and credit history lack age.

[Anonymous]

Thanks, I am looking to establish good credit. So would it be best to use the 2 I have and let it report for both, less 9% utilization between both, or use both and pay 1 off before statement cuts and only have one report less 9%?