topic Re: The Truth about Credit Card Utilization in Understanding FICO® Scoring

The Truth about Credit Card Utilization

Anonymous — Mon, 18 Dec 2017 18:22:23 GMT

Another post to add to my signature link of common questions and answers new members post!

Your FICO score is more than your overall utilization

This is a huge huge huge sentence to read, re-read, and memorize.

People working on raising the credit scores or complaining about a FICO score drop alert usually post their aggregate/utilization. They'll say "But my utilization is just 10%!". Great, that's useless data. Stop doing that.

The reality is that FICO scores rely on more than just your overall utilization to make scoring decisions. If you want to even bring up utilization, you have to be clear about what is hurting your score.

FICO Scoring and Utilization Points

The FICO Score 8 algorithm is totally trade secret. Nobody who knows the actual equations can talk about it. Still, with thousands of data points over many years, I myself have come up with a simple set of guidelines. Note that FICO isn't a "one score fits all" algorithm. Different profiles of people are on different "Scorecards" and each area of the score is measured differently. My guidelines here below are just generic ones not making assumptions about what scorecard you are on. You can't really tell anyway, but your mileage may vary.

We do know that FICO admits that "Amounts Owed" is about 30% of your FICO score. You have 550 available points (300 is given to everyone for free just for having a 6 month old or older credit account). 30% of 550 is 165 points just for "Amounts Owed". My own analysis tells me that there's more than 165 points available (closer to 180 points) but FICO offers some hidden overhead buffer for people with truly amazing credit. You and I probably don't fall into that category.

Of the "Amounts Owed", the most important portion is amounts owed on credit cards. Installment loans likely count for way less of this category -- about 30 points out of the 180 total points is likely for installment loans. This leaves about 150 points for credit card utilization.

FICO Aggregate Utilization -- while this is the most important and largest part of "Amounts Owed", it's also just one factor. I've analyzed many profiles and 3Bs and my magic spreadsheets tell me that Aggregate Utilization (overall) is worth around 90-100(overhead) points out of 150 left. To calculate your aggregate utilization, you just add up all your credit limits (include chargeoff accounts at $0 but include them) and then add up all your credit balances (including chargeoffs). The divide the second number into the first number to get a percentage.

The generic "value" I've personally given to aggregate utilization is:

9-29% utlization: subtract 10 points
29%-49% aggregate utilization: subtract 10 points
49%-69% aggregate utilization: subtract 10 points
69%-89% aggregate utilization: subtract 20 points
89%-99.9% aggregate utilization: subtract 20 points
100% or higher aggregate utilization: subtract 20 points

Again, these are just "averages" I've seen looking at a lot of reports until I'm blind. But when I've told folks to pay down aggregate utilization, I've consistently seen returns of about that amount. As you can see, carrying aggregate utilization hurts you a LOT, and the higher it goes, the more it hurts. There may be a threshold at 19%-29% but I'm not 100% certain. I'll be testing that myself. Also note that within any given "threshold" you may get a few points back for being on the lower end versus the higher end.

But just counting aggregate utilization is NOT enough, because out of the 150 points probably set up for "Amounts Owed" for credit cards in FICO Score 8, another 50 points may be targetted to individual card utilization. 50 points is HUGE, and it's a make-or-break situation if you're on the edge of a better credit score tier.

Individual utilization: this section is absolutely confounding to me because it seems to be valued based on how many credit cards you have, not just if one or two cards are high utilization. I've been working on the analysis and math and doing recursive testing against a large data set, but so far it's too complicated for my simple math skills. Still, I work on it weekly, and more data points helps me figure it out more!

It appears that individual utilization might be calculated based on these points as a percentage of your cards that are at that utilization. This means someone who has 1 card at 90% individual utilization out of 3 total credit cards is hit much harder than a person with 1 card at 90% individual utilization who has 20 total credit cards.

Again, these are generic values I attribute to individual utilization, but they've fit my forecasts personally and with other folks I've helped:

Individual card with 29-49% utilization: subtract 5 points (multiply by number of cards with utilization/total number of cards)
Individual card with 49%-69% utilization: subtract 5 points (multiply by number of cards with utilization/total number of cards)
Individual card with 69%-89% utilization: subtract 5 points (multiply by number of cards with utilization/total number of cards)
Individual card with 89%-99.9% utilization: subtract 10 points (multiply by number of cards with utilization/total number of cards)
Individual card with 100%+ overlimit utilization: subtract 10 points (multiply by number of cards with utilization/total number of cards)

I know those numbers only add up to 35 points instead of 50 points, but somewhere in there are what appears to be 15 points of overhead that vary a lot on the person's profile scorecard. I haven't had enough data points to break it down as to why one person may get dinged up to 50 points for individual high utilization while another gets dinged 35 points. The only thing that makes sense if the overhead is part of the scorecard in this section.

So what to do about utilization?

Obviously, you want to first target aggregate utilization by making sure if you're close to the lower threshold to pay a bit more to get below it. It makes a huge difference.

But if you have any individual cards with high utilization, it makes sense to pay those down if you're close to a lower threshold to get back a few points.

One thing that people always tell me is that they want to "get more credit cards to help with utilization." This absolutely works, but one thing to note is that it seems to help more with overall utilization and less with individual -- for whatever reason, my theory tells me that brand new cards may not count towards the "individual utilization multiplier" for a period of time. I can't tell if it's 6 months, or 12-24 months, or some other value, but I have noticed that people get back magical FICO points well after getting new cards and those points don't make much sense even from aging perspectives.

These are all just guesses

Remember, these are just my personal guesses and not FICO fact or involved with anyone at MyFico forums. But it's important for you to personally test your own credit score based on these factors. Do not assume that just because your overall utilization is at 10% that you're not getting harmed for 20-30 points because of some accounts with very high utilization. It's feasible that a person may have 10 credit cards and only carry 90% utilization on 2 of them, but if those cards have the lowest credit limits versus the rest, you may be dinged significantly for them.

You may have a $10,000 Lowes card with $0 balance, and a $8000 Walmart card with $0 balance, but if your $500 Capital One card is reporting $460 and your $500 Chase Freedom card is reporting $434, you may be dinged more than you'd realize even though your overall utilization is under 5%. Those individual utilization matter, and in the case of maximizing FICO scoring, they may matter a lot.

One thing I do ask folks to do is please don't just post your overall utilization if you're asking questions about scoring, FICO drop alerts, etc. Please make sure to post not just your overall utilization, but the number of total credit cards you have, any ANY credit card that utilizes more than 48% of its limit.

This helps us help you better, and it also goes to show that you've done your homework!

Re: The Truth about Credit Card Utilization

kilroy8 — Mon, 18 Dec 2017 19:17:15 GMT

I'm feeling like I should put this on the refrigerator or something. Maybe just on the wall in my office.

Thanks for all this great info!

Re: The Truth about Credit Card Utilization

Anonymous — Mon, 18 Dec 2017 19:49:56 GMT

Just remember it's generalized data and may not apply exactly to YOUR profile. But, if you have data points that contradict it, please report them. Also if you have data points that agree, report them, too. I just formulate flat charts based on lots of data points and look for people in the bell curve, but outliers are the ones that help me figure out those doggoned scorecards.

Playing the utilization game is frustrating at first, but once you figure out what "fits" your score goals, it's quite easy. It also teaches us not to let balances report for long.

Re: The Truth about Credit Card Utilization

Anonymous — Mon, 25 Dec 2017 02:44:20 GMT

Thank you for this post. I was about to ask a question regarding individual utilization as it refers to credit score as I'm currently attempting to break into the 800's. My scores range from 735 to 760 right now depending on the source or scale used. 12 cards with 5 with balances. 128k total limits. Oldest card is 13 years 2 months old. Newest is 1 month. 4 hard inquiries in the last 2 years. 2 in last 6 months. Average age is 3 Years / 9 months. About 24% overall utilization.

Using the data in your post above, I'm guessing I should concentrate on the accounts with the highest utilization and rotate large payments to the next highest utilization card in order to keep my score as high as possible while eventually paying down to zero. Is this correct? Any advice is greatly appreciated.

Amex: 7,354 / 12,500 60%

Barclays Ring: 7,221 / 17,500 50%

Chase Freedom Unl: 6,788 / 11,300 60%

Citi TY Premier: 6,000 / 19,900 30%

Discover IT: 4,246 / 14,400 29%

Best Buy: 0 / 600

Dell: 0 / 6,500

Cap1 Quicksilver: 0/ 10,000

BofA Plat Plus: 0 / 10,000

Citi Simp: 0 / 6,500

WF Propel: 0 / 10,000

Citi Double Cash: 0 / 13,500

Re: The Truth about Credit Card Utilization

Anonymous — Fri, 05 Jan 2018 00:48:39 GMT

Sorry for the late reply, I was in the Caribbean with poor internet.

The rule I came up with involves the following order of operations:

If aggregate utilization > 89%, pay down aggregate to below 88.9%.
If aggregate utilization > 69%, pay down aggregate to below 68.9%.
If any individual card utilization > 89%, pay down that card to below 88.9%.
If aggregate utilization > 49%, pay down aggregate to below 48.9%.
If any individual card utilization > 69%, pay down that card to below 68.9%.
If aggregate utilization > 29%, pay down aggregate to below 28.9%.
If any individual card utilization > 49%, pay down that card to below 48.9%.
If aggregate utilization > 9%, pay down aggregate to below 8.9%.
If you have balances reported on more than 1/3 of your credit card count, get your card balances so that no more than 1 out of 3 cards shows a balance. If you only have 5 cards, this means 1 card with a balance as 2 cards would be 2/5 which is greater than 1/3.
If any individual card utilization > 29%, pay down that card to below 28.9%.
If ALL credit cards report $0 balance, let ONE card report greater than $3 but less than 8.9% individual utilization.
If any individual card utilization > 9%, pay down that card to below 8.9%.

You're not in bad shape, but having 3 cards over 48.9% individual utilization is hurting you, and 5 cards with balances out of 12 is also dinging you. The less than 1 out of 3 cards with balance means out of 12 total cards, you want a balance reporting on only 3 cards or less (NOT 4 cards as 4/12 = 1/3, and you need it LESS than 1/3, so 3 cards or less).

Re: The Truth about Credit Card Utilization

Anonymous — Fri, 05 Jan 2018 18:50:26 GMT

Thank you for the detailed explanation and answer to my question. I've since paid off and consolidated down to 2 cards out if the 12.

My Barclays Ring is at $16,255 of $17,300 and my City TY Pref is at $10,236 of $19,900. Everything else is at zero and both of these cards will be reported around the 24th of this month. The others will update around the 10th. I should be able to drop another 3k on to the Barclays by the 18th.

So these two cards have increased but I've also eliminated the others and dropped my overall balance. Curious to see what effect this will have on my score. Thanks again for your advice. I will do my best to follow it in my quest for 800+ credit score.

Re: The Truth about Credit Card Utilization

Anonymous — Fri, 05 Jan 2018 20:36:40 GMT

Oh if only this applied to Fico 09 which for me is 30 point lower than FICO 08. I personally expect my 08 to be above 720 within the next 2 weeks after 5 revolving accounts were paid in full, but I don't have a clue what affects that will have on 09.

Re: The Truth about Credit Card Utilization

Anonymous — Fri, 05 Jan 2018 20:59:47 GMT

@Anonymous wrote:
Oh if only this applied to Fico 09 which for me is 30 point lower than FICO 08. I personally expect my 08 to be above 720 within the next 2 weeks after 5 revolving accounts were paid in full, but I don't have a clue what affects that will have on 09.

I don't think there is any reason to believe that FICO 9 is substantially different from FICO 8 in terms of the ideal configuration of credit card balances. As with FICO 8....

(1) Total Utilization: Under 8.99%

(2) Individual Utilization: Under 28.99%

(3) Number of cards reporting a positive balance: Most cards at $0 with one card showing a balance.

There could be lots of reasons that your FICO 8 is higher (or lower) than FICO 9, but in terms of practical strategy, CC balances shouldn't be one of them. Keep most cards at zero and your utilization fairly low on the others.

Re: The Truth about Credit Card Utilization

Anonymous — Sun, 11 Feb 2018 18:22:25 GMT

This is a great post with a lot of information and insight! Thank you!

The credit system is one of the biggest scams running on consumers. A score is generated that is made up of several factors. While the bureaus weigh each factor one way the place considering your application can weigh certain factors differently so in reality your FICO score from FICO may not be what the company processing your credit application calculates. Applying for credit reduces your score, but you can't get credit without applying. A higher score gets you better interest rates, less money down, a higher limit and maybe some other perks but you're losing points just by applying. Despite big companies calculating their own score and reporting a hard inquiry that lowers your FICO score they agree to allow you a certain amount of liability. If you don't use it very much they reduce your credit limit and that increases your credit to debt ratio which lowers your credit score. If you take an advantage of a 0% transfer balance that raises your credit utilization on this particular card it lowers your scores. You can make payments on time for years and your score can drop because banks cut your credit limit because you weren't using it, or because you maxed out another card to take advantage of a 0% transfer balance, or because you applied for credit because you can't raise your credit score without having credit. Well, guess what? You can't raise your score by making payments on time because the banks can still manipulate your credit score to keep it low and keep your interest rates high!

Re: The Truth about Credit Card Utilization

arkane — Mon, 12 Feb 2018 00:57:16 GMT

While I understand your frustration with the credit system, and at times it may almost seem like you have to take on debt in order to get a better score, you have to keep in mind that fundamnetally, the credit score is essentially a measure of risk. (risk of default I believe?) Nobody wants to be stuck holding the bag, and so purely from a lender's perspective, I can understand why certain actions affect the score the way they do.

At the end of the day, you'll feel much better if you keep this in mind: the score exists for the lenders' benefit, NOT ours.

wrote:
This is a great post with a lot of information and insight! Thank you!

The credit system is one of the biggest scams running on consumers. A score is generated that is made up of several factors. While the bureaus weigh each factor one way the place considering your application can weigh certain factors differently so in reality your FICO score from FICO may not be what the company processing your credit application calculates. Applying for credit reduces your score, but you can't get credit without applying. A higher score gets you better interest rates, less money down, a higher limit and maybe some other perks but you're losing points just by applying.

The more credit you have, the more the banks have to lose if you suddently stopped paying, hence the (temporary) drop in score. But good payment behavior demonstrates your low risk, thus any penalty for having a new account starts to diminish as time goes on. I can tell you from personal experience I gained +10 TU and +12 EX even at just the 3 month mark.

Despite big companies calculating their own score and reporting a hard inquiry that lowers your FICO score they agree to allow you a certain amount of liability. If you don't use it very much they reduce your credit limit and that increases your credit to debt ratio which lowers your credit score.

Yes CLD are always unpleasant but unfortunately they're a part of reality. The most common advice being given is to use your cards at least once every few months (or ideally, just buy a pack of gum each month to show activity). But that may not be enough depending on what bank it is and what your current limit is.

If you take an advantage of a 0% transfer balance that raises your credit utilization on this particular card it lowers your scores. You can make payments on time for years and your score can drop because banks cut your credit limit because you weren't using it, or because you maxed out another card to take advantage of a 0% transfer balance, or because you applied for credit because you can't raise your credit score without having credit. Well, guess what? You can't raise your score by making payments on time because the banks can still manipulate your credit score to keep it low and keep your interest rates high!

If you actually max out a card (I think FICO sees >80% or 85% util as being "maxed out), your score drops significantly because the bank has much more to lose if you stopped paying. Everything else equal, someone who's used 80% of their card's limit IS a much greater risk to the bank than someone who's only used 10% of their limit. Now the reason why on time payments for years doesn't completely mitigate util is because it's essentially a static risk. Purely from a numbers perspective, the higher your balance, the more the bank has to lose, regardless of how low risk you are. That being said, you don't get as much of a ding on a thick, established file with perfect payment history as if you would on a thin, young file in the form of "age of accounts", so it's somewhat taken into consideration.

Re: The Truth about Credit Card Utilization

Anonymous — Mon, 12 Feb 2018 02:08:21 GMT

Thank you Arkane for your response.

I understand that if I decided to stop paying they're on the hook. They should consider that when they process my application and agree to provide a certain amount of liability when they know how much I make and what accounts are already open. I've had several banks cut my limit despite me making payments on time for all of my accounts. Businesses need to limit their liability and there are no laws that prevent them from offering a teaser limit only to reduce it later. Many consumers are penalized because of their incompetence to properly assess liability when they process an application dropping their credit scores, an then penalizing them again when they reduce their limit changing their credit to debt ratio.

CLD's are also done because banks are worried about news that inflation is rising, the FED is raising borrowing rates, and they pass those costs onto consumers through higher interest rates, reducing perks and increasing fees.

I understand that a higher credit utilization on a single card will drop your credit score, but the penalty creates a domino effect that penalizes consumers unfairly. One of my bank cards had a 0% balance transfer deal and when I called to ask about it suddenly they doubled my credit limit. I transfered three balances for cards that had 18% interest that were only about 30% utilization on each card. This was going to save me $1,600 and I'm positive that I can pay off the card 3 - 4 months before the transfer runs out. By saving money I'm lowering my score, which makes other banks drop my limits which drops my score even more. That's legal but it's not fair to consumers. The only way to raise your score is to stay in debt and make rich people richer, but make no doubt, the game is rigged against consumers and you'll never stay on top of the game.

As far as keeping your accounts active, making small purchases and paying them off in full every month was something I tried but again, since I wasn't carrying a balance they dropped my balance. If you don't carry a balance you're not paying interest and you don't need a higher limit.

Re: The Truth about Credit Card Utilization

Moneyklutz — Mon, 12 Feb 2018 02:48:13 GMT

Back on topic...

ABCD...are installment loans viewed the same as credit cards in FICO's eyes?

If I had multiple loans say car, home and a motorcycle, will they be scored like credit cards (Individual and aggregate) or are they lumped together in one bucket?

Re: The Truth about Credit Card Utilization

Kree — Mon, 05 Mar 2018 14:09:13 GMT

wrote:
Back on topic...

ABCD...are installment loans viewed the same as credit cards in FICO's eyes?

If I had multiple loans say car, home and a motorcycle, will they be scored like credit cards (Individual and aggregate) or are they lumped together in one bucket?

They are scored both individually and aggregated, but I believe the scoring is much more lenient for high balances than ~~unsecured debt.~~ revolving loans.

EDIT: as pointed out not all unsecured debt is revolving, and not all revolving is unsecured.

Re: The Truth about Credit Card Utilization

Anonymous — Mon, 26 Feb 2018 15:46:01 GMT

Thank you so much for posting these in depth breakdowns. They have helped me tremendously. I' printed both Fico score breakdowns/utlizations breakdowns off to keep them handy.

Just wanted to say THANK YOU!

Re: The Truth about Credit Card Utilization

OmarR — Sun, 04 Mar 2018 17:14:57 GMT

Do store cards count towards the "minimum 3 cards for best score" rule?

Re: The Truth about Credit Card Utilization

Anonymous — Sun, 04 Mar 2018 18:06:42 GMT

@Kreewrote:
wrote:
Back on topic...

ABCD...are installment loans viewed the same as credit cards in FICO's eyes?

If I had multiple loans say car, home and a motorcycle, will they be scored like credit cards (Individual and aggregate) or are they lumped together in one bucket?
They are scored both individually and aggregated, but I believe the scoring is much more lenient for high balances than unsecured debt.

Hi Kree! Slight change in wording.... the distinction is not so much between secured and unsecured debt but between revolving and installment debt. FICO does one set of "utilization" calculations for revolving debt (e.g. credit cards) and another set of util calculations for installment debt.

Within those account types I don't think there is any evidence that it treats secured debt (e.g. a secured credit card, a share secure loan, an auto loan) different from unsecured debt (typical credit card, unsecured personal loan, etc.).

The installment utilization calculations probably do not consider individual utilization (only aggregate) but revolving calculations care about both total and individual.

Re: The Truth about Credit Card Utilization

HeavenOhio — Sun, 04 Mar 2018 18:07:27 GMT

@OmarRwrote:
Do store cards count towards the "minimum 3 cards for best score" rule?

Yes, with one caveat. On a few profiles, we've seen that if a store card is the one card to report a non-zero balance, the score isn't quite as high as when the non-zero balance is on a major card.

Re: The Truth about Credit Card Utilization

Anonymous — Sun, 04 Mar 2018 18:11:48 GMT

@OmarRwrote:
Do store cards count towards the "minimum 3 cards for best score" rule?

Yes. Store cards count just like any other credit card as far as FICO goes. Other scoring models (such as the non-FICO models used by the insurance industry) penalize you for having store cards.

PS. Just saw Heaven's post. That's interesting.

Re: The Truth about Credit Card Utilization

OmarR — Sun, 04 Mar 2018 22:38:17 GMT

Thank you both!

Re: The Truth about Credit Card Utilization

Anonymous — Mon, 05 Mar 2018 00:33:25 GMT

I personally on my profile have never experienced a scoring variance in letting a store card be my AZEO card verses a major bank card. I only have 1 store card, but do recall it being my only card with a reported balance back in 2016 and did not see a penalty. That's not to say it can't happen on a different profile, but it didn't matter on mine. My file at the time was dirty, just to provide that data point.