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From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION

Regular Contributor

From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION


How To Improve Your Credit Utilization
Oct 1, 2015 | John S Kiernan

How To Improve Credit Utilization

Credit utilization, the percentage of your available credit that you use each month, is a critical component of your credit score which ultimately serves as an indicator of financial restraint and, thus, your ability to handle additional spending power. More simply, most creditors prefer customers who use only a portion of their allotted credit lines because it reflects reasonable spending habits, and such individuals are statistically the most likely to pay their bills on time in the future.

The rest of the article can be found here:  https://wallethub.com/edu/how-to-improve-credit-utilization/17190/

Message 1 of 13
12 REPLIES
Super Contributor

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION

All of that fluff above is great and all, but there are really only 2 things one has to lower/keep utilization low.  The first is for people that have high utilization currently and the second for those that don't have that problem:

 

1 - Pay off your debt.  There's no magic forumula here.  Pay down/off your debt and your utilization improves.  Once you're there, refer to "2" below.

 

2 - Never buy anything with a credit card that you wouldn't/couldn't pay for in cash today.  Always PIF your CC balances and/or treat it like you would a debit card.  Following the philosophy of "2" here will avoid you from arriving at "1."

Message 2 of 13
Valued Contributor

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION


@BrutalBodyShots wrote:

All of that fluff above is great and all, but there are really only 2 things one has to lower/keep utilization low.  The first is for people that have high utilization currently and the second for those that don't have that problem:

 

1 - Pay off your debt.  There's no magic forumula here.  Pay down/off your debt and your utilization improves.  Once you're there, refer to "2" below.

 

2 - Never buy anything with a credit card that you wouldn't/couldn't pay for in cash today.  Always PIF your CC balances and/or treat it like you would a debit card.  Following the philosophy of "2" here will avoid you from arriving at "1."


+ 1000 I feel that really needs to be emphasized...studies show that people tend to spend more on a credit card than they would if paying in cash!!! If you can not remain disciplined enough to resist it causing un-needed spending, then you would be better off without any credit cards. Never ever allow plastic cards to cause you to live beyond your means...IMHO, it just is not worth it. You should control your credit cards rather than let your cards control you...end of sermon!!!!





TU fico08=810 09/28/18
EX fico08=796 10/06/18
EQ fico08=813 10/04/18
EX fico09=803 10/03/18
EQ fico bankcard08=829 09/25/18
Garden since 07/02/18
Message 3 of 13
Super Contributor

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION

Very solid feedback from Sarge above!

Message 4 of 13
Moderator

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION

Hi @Tryin2betterscore2, your post has been edited to conform to our guidelines here.

 

Please see the following for more details:  https://ficoforums.myfico.com/t5/Credit-in-the-News/Citing-articles-please-read-before-posting/m-p/5...

Message 5 of 13
Community Leader
Super Contributor

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION

The WalletHub piece is fairly decent, but there's at least a couple things in it worth correcting.  I include them below with my comments in blue.

 

30% Is The Golden Rule, But Too Low Isn’t Optimal: It’s generally recommended that consumers keep credit utilization below 30%, which is good advice that can also be a bit misleading.

 

I was hoping the author would go on to clarify two particular ways that it is misleading, but he doesn't mention either:

     (1)  The optimal threshold is not under 30% but actually under 8.99%.  Going from 28% to 8% will give you a significant boost.

     (2)  If the best somebody can achieve is in the vicinity of 30% (due to limited funds) then he needs to make sure he gets under 28.9%.  A utilization of 29.1% will be rounded up to 30% which will be penalized noticably more sharply then if it was at 28.7%.

   

While maintaining zero utilization is certainly better than maxing out your credit cards, swearing off credit entirely doesn’t necessarily engender confidence among potential lenders because question marks will still remain regarding how you might ultimately leverage the credit made available to you, should the circumstances ever demand it.

 

It's not simply that an individual lender might have an issue with it, but all cards at zero has a FICO scoring penalty as well.

 

The best approach is to make sure you are using at least one card each month and paying off the balance in full when the statement comes.

 

This is very misleading, in that it gives the reader the impression that paying in full is a way of controlling utilization.  It is not.  To PIF, while laudable in that prevents paying interest, has nothing to do with reported utilization.  A person could PIF after the statement prints every month and have a utilization at 70% or even higher.  The writer needs to help his reader understand how balances are reported to the bureaus and then how to control how much these amounts are, typically by controlling the balance (i.e. paying it down) before the statement comes.


Everything Is Relative: Not everyone is evaluated according to the same utilization scale. What matters most is how your utilization compares with that of other individuals who are approximately your age and have similar financial profiles in terms of factors such as income and debt obligations.

 

This is untrue.  FICO does not take into account the consumer's age, and I am pretty sure it is illegal for individual lenders to do that either (happy to be corrected if I am mistaken on that point).  Income is also not taken into account by FICO -- and as far as I know reported utilization is not considered differently based on a person's income, even by individual lenders.  Here it is possible that the writer is thinking of DTI, but that is very different from revolving utilization.

Message 6 of 13
Super Contributor

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION

Nice work finding the holes in that article, CGID.
Message 7 of 13
Valued Contributor

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION


@Tryin2betterscore2 wrote:


How To Improve Your Credit Utilization
Oct 1, 2015 | John S Kiernan

How To Improve Credit Utilization

Credit utilization, the percentage of your available credit that you use each month, is a critical component of your credit score which ultimately serves as an indicator of financial restraint and, thus, your ability to handle additional spending power. More simply, most creditors prefer customers who use only a portion of their allotted credit lines because it reflects reasonable spending habits, and such individuals are statistically the most likely to pay their bills on time in the future.

The rest of the article can be found here:  https://wallethub.com/edu/how-to-improve-credit-utilization/17190/


If utilization was a reflection of spending habits it would have to use prior utilization...which it does not. Utilization is a point in time metric and only considers what your utilization is at the time of the pull. If your score takes a hit for having a very high utilization one month, you can regain every point you lost if your utilization is low the next month. In fact, you could have a 70% utilization every month before the pull and then pay it all off except for <8.9% on one card, and your score will be the same as if it was always that low. In order for something to indicate a spending habit, previous history would need to be considered.





TU fico08=810 09/28/18
EX fico08=796 10/06/18
EQ fico08=813 10/04/18
EX fico09=803 10/03/18
EQ fico bankcard08=829 09/25/18
Garden since 07/02/18
Message 8 of 13
Established Contributor

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION


@BrutalBodyShots wrote:

All of that fluff above is great and all, but there are really only 2 things one has to lower/keep utilization low.  The first is for people that have high utilization currently and the second for those that don't have that problem:

 

1 - Pay off your debt.  There's no magic forumula here.  Pay down/off your debt and your utilization improves.  Once you're there, refer to "2" below.

 

2 - Never buy anything with a credit card that you wouldn't/couldn't pay for in cash today.  Always PIF your CC balances and/or treat it like you would a debit card.  Following the philosophy of "2" here will avoid you from arriving at "1."


I generally agree but will add one notable exception: you have a long 0% APR period (let's say >12 months), and have a huge purchase (>10K) coming up.

 

I think in that scenario, even if you could pay off the >10K immediately, it would be better money-wise to just keep that sum in a high yield savings account/investment account, and treat the CC balance essentially as an interest-free loan.


8/4/18:

Message 9 of 13
Regular Contributor

Re: From Wallethub, HOW TO IMPROVE CREDIT UTILIZATION


@sarge12 wrote:

+ 1000 I feel that really needs to be emphasized...studies show that people tend to spend more on a credit card than they would if paying in cash!!! If you can not remain disciplined enough to resist it causing un-needed spending, then you would be better off without any credit cards. Never ever allow plastic cards to cause you to live beyond your means...IMHO, it just is not worth it. You should control your credit cards rather than let your cards control you...end of sermon!!!

My new $30K, $700 per month installment loan totally agrees with this point!  Lesson learned!

Message 10 of 13