Shouldn't high utilization = good for your score??

[techcrium]

Let's say an 18 year old applies for a credit card and got $500 credit and he also has a job earning him money.

Conventional wisdom tells us that he should be spending $50 (10% of total credit) per month and paying that off to build credit.

1. How in the world can he build credit this way? Dinner and a movie? "Sorry but I can't pay for the movie as I already put $50 today for the dinner."

2. Doesn't logic tell us that, "hey if he's spending $450 per month on $500 available credit, 90% utilization. That tells us that he NEEDS more credit.

3. Consequently, if he is spending $50 per month on $500 available credit 10% utilization...that tells us that he DOESNT need credit. He can't even spend 10% of $500 credit card!!!"

[Anonymous]

The logic is that you are using a large amount of your revolving credit and therefore are reliant on it, as you don't have the means to pay cash. In your specific example, run as much through it as you want, but make a payment before the statement cuts and your utilization will stay low, but the CC Company will still see the large usage, it just won't be reported.

[Thomas_Thumb]

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@techcrium wrote:

Let's say an 18 year old applies for a credit card and got $500 credit and he also has a job earning him money.

 Conventional wisdom tells us that he should be spending $50 (10% of total credit) per month and paying that off to build credit.

1. How in the world can he build credit this way? Dinner and a movie? "Sorry but I can't pay for the movie as I already put $50 today for the dinner."

2. Doesn't logic tell us that, "hey if he's spending $450 per month on $500 available credit, 90% utilization. That tells us that he NEEDS more credit.

3. Consequently, if he is spending $50 per month on $500 available credit 10% utilization...that tells us that he DOESNT need credit. He can't even spend 10% of $500 credit card!!!"

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Credit card companies primarily look to see that you are actively using the card and always paying on time. You may not get automatic CL increases if you don't charge a high percentage. However, if you ask for a CLI you won't get turned down due to spend habits - you get turned down due to lack of income, low credit score or a recent CLI. [it is more what you qualify for, not what you show for spend - as long as the card is actively used]

I have a card I routinely charged 10% of my credit limit on each month. I asked for and had the limit doubled - no problem and no questions regarding why a higher CL when your spend is low.

I would never allow utilization to report at 90% as that is a flag for scoring. However, allowing up to 30% of CL report is not an issue given you are building credit. Whatever you let report, pay the balance on time and in full every month. That shows you can handle your existing credit responsibly - which is what creditors are looking for. They are not looking for needy.

Good Luck.

[Anonymous]

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@Thomas_Thumb wrote:

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However, if you ask for a CLI you won't get turned down due to spend habits - you get turned down due to lack of income, low credit score or a recent CLI. [it is more what you qualify for, not what you show for spend - as long as the card is actively used]

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I was recently turned down for a CLI due to lack of spend by Capital One.

"Recent use of this account's existing credit line has been too low"

Now there may be another reason, but that is the reason they gave me.  Its my lowest limit card ($8250), it is an 8 year old account, its a QS that was PC'd from a Platinum, last CLI was a year ago, with a high interest rate that I am unable get them to lower.  I never carry a balance on it, so I am not really worried about the APR and I have several "Temporarty APR Reduction Offers" that I have been told that I can just call in before statement cut and use for 6 months at a time.  I put anywhere between $200 and $2500 a month through it depending on the month.  My income likely supports higher limits, but my spend may not.

[elim]

Remember,  We use the terms "usage" and "utilization", and they are very different.

Usage is how much you put through the card during the month. (spend)

Utilization is what is currently being  reported to CRA's on that card. (scoring)

It is very common for someone trying to build a limit (on a low limit card) to have 2x to 4x the limit in usage and report 1% utilization (build up to the limit and pay down multiple times a month and let $5 report on the statement).

I only play that game when I need a score bump to app.  Normally i use a card up to 30% and pay after statement cuts.

[NRB525]

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@Anonymous wrote:

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@Thomas_Thumb wrote:

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However, if you ask for a CLI you won't get turned down due to spend habits - you get turned down due to lack of income, low credit score or a recent CLI. [it is more what you qualify for, not what you show for spend - as long as the card is actively used]

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I was recently turned down for a CLI due to lack of spend by Capital One.

"Recent use of this account's existing credit line has been too low"

Now there may be another reason, but that is the reason they gave me.  Its my lowest limit card ($8250), it is an 8 year old account, its a QS that was PC'd from a Platinum, last CLI was a year ago, with a high interest rate that I am unable get them to lower.  I never carry a balance on it, so I am not really worried about the APR and I have several "Temporarty APR Reduction Offers" that I have been told that I can just call in before statement cut and use for 6 months at a time.  I put anywhere between $200 and $2500 a month through it depending on the month.  My income likely supports higher limits, but my spend may not.

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There is another reason: It's Capital One. The card has probably reached the ceiling of CL that they will allow.

Your best option now, if you want a higher limit, lower APR card, is to check the Capital One prequalification and when the APR is lower, the APR is what you want, app the Quicksilver or Venture for the lower APR and much higher CL.

[NRB525]

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@Thomas_Thumb wrote:

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I would never allow utilization to report at 90% as that is a flag for scoring.

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I've often had cards, including large limit cards, report 90% balances, usually from BT offers. Yeah, it brings the score down a bit, but in the long run, you end up with periodic large balances on your historical CR. Utilization is temporary. Just be sure you can pay it back, and don't miss any payments.

Generally one does want to keep cards reporting less than 90%, but in the OP scenario, running that $500 up near the limit, in my opinion, is a fine idea.

[Anonymous]

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@elim wrote:

Remember,  We use the terms "usage" and "utilization", and they are very different.

Usage is how much you put through the card during the month. (spend)

Utilization is what is currently being  reported to CRA's on that card. (scoring)

It is very common for someone trying to build a limit (on a low limit card) to have 2x to 4x the limit in usage and report 1% utilization (build up to the limit and pay down multiple times a month and let $5 report on the statement).

I only play that game when I need a score bump to app.  Normally i use a card up to 30% and pay after statement cuts.

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+1

[takeshi74]

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@techcrium wrote:

Shouldn't high utilization = good for your score??

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Nope.  High utilization is a risk factor.

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@techcrium wrote:

Conventional wisdom tells us that he should be spending $50 (10% of total credit) per month and paying that off to build credit. 

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Conventional wisdom doesn't have much to say on credit scoring.  Most consumers have no idea about credit and how it is scored or assessed.

10% isn't conventional wisdom.  It's a guidline for "ideal" revolving utilization.  It is also in reference to how much should report for ideal utilization.  Spend can be up to 100% or more.  Reporting all depends on whatever the balance is on report date.  One doesn't have to restrict spend to control reported utilization.  The balance can be reduced by report date to manage reported utilization.

Addtionally, someone building at that stage doesn't need to obsess over being at 10% though plenty do this anyway.

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@techcrium wrote:

Doesn't logic tell us that, "hey if he's spending $450 per month on $500 available credit, 90% utilization. That tells us that he NEEDS more credit.

Consequently, if he is spending $50 per month on $500 available credit 10% utilization...that tells us that he DOESNT need credit. He can't even spend 10% of $500 credit card!!!" 

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Need doesn't really play a role in granting credit.  Plenty of people could spend more but don't have the credit to support higher limits.  It's really more about track record, management and risk assessment.

There are reasons why a person would have a $500 limit to begin with that would indicate issues with one's credit -- maybe a lack of history, maybe derogs, maybe both.  You can't focus solely on one part of the puzzle and ignore everything else while expecting to reach "logical" conclusions.

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@techcrium wrote:

How in the world can he build credit this way?

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The same way everyone builds credit.  I didn't start out with 4 and 5 digit limits and bottom of the range APR's.  We're all subject to the same system.  Your example person isn't being singled out.  A lot of people do this all the time.

There are certainly issues with the system.  I'm not arguing that it's perfect.  However, we're all dealing with the same playing field.  From a practical perspective you can either argue that it's all wrong (without really understanding it in this case) or you can learn about it and make the most of it.  I've found the latter to be much more productive.

[Anonymous]

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NRB525 wrote:

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There is another reason: It's Capital One. The card has probably reached the ceiling of CL that they will allow.

Your best option now, if you want a higher limit, lower APR card, is to check the Capital One prequalification and when the APR is lower, the APR is what you want, app the Quicksilver or Venture for the lower APR and much higher CL.

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I doubt I will ever apply for any other cap one cards even though I prequal at the lowest rates there.  I have two other cards with higher limits and single digit APRs.

i have taken it as a personal challenge to get 5 digits on this card...