Confusion About Utilization Rate

[Anonymous]

Hey Guys,

I am completely new to credit, as I am a college student. I am trying to build a strong credit score, so I want to make sure I take all the right steps.

As of right now I only have one credit card. I got approved for Capital One Journey, with a credit limit of $300. I have a few questions as to how I should go about spending and paying for this card. I was originally planning on spending a large portion of the $300, then paying off my whole balance by the due date. But I am reading that I should not spend more than 9% of my credit limit, to keep my utilization rate <9%. Is this true? So, essentially, I cannot spend more than $27? With such a small credit limit, this seems like a ridiculous amount to which to limit myself, so I am wondering if I am understanding the utilization rate correctly. Or does <9% utilization rate imply I should carry a balance of less than $27 and not pay off the balance in full each month? Aren't you supposed to never carry a balance (especailly with such high student credit card APR rates)? I am confused..help!

Thank you so much! 

[Anonymous]

if you can pay it off

charge it to the max balance and pay it off then call them to ask for a credit limit increase

unless you plan to apply for more cards within the month

i would just build some history on it and get a increase then get more cards to increase your overall limit

or vice versa apply for more first until you get denied then run it up and pay off

[Thomas_Thumb]

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@Anonymous wrote:

if you can pay it off

charge it to the max balance and pay it off then call them to ask for a credit limit increase

unless you plan to apply for more cards within the month

i would just build some history on it and get a increase then get more cards to increase your overall limit

or vice versa apply for more first until you get denied then run it up and pay off

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Given you only have one credit card which is new, forget about the utilization threshold - it has no relevance for you . You are in credit building mode. The key is to show you are credit worthy. Feel free to charge up to 80% of the max credit line - but don't go to the limit. My advice is to always pay in full when the statement comes. This will help demonstrate you are credit worthy (and you will avoid interest payments)
.

Ask for a credit line increase on your card after 6 months. This may result in a hard inquiry but it has a short term effect. If your payment record is solid you should get a credit line increase. Then let another 3 to 6 months pass and apply for another credit card. Again, this will result in a hard inquiry but, that is expected. Ultimately having two cards will increase your aggregate credit line which is used in almost all credit risk models.

You are at the point where establishing new/increasing existing credit lines is a primary objective. Manage borrowing to avoid late payments or defaults. If you need a car and can afford it, consider an installment loan. This increases type of credit in your file which over time adds value to your credit risk scores.

[takeshi74]

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@Anonymous wrote:

As of right now I only have one credit card. I got approved for Capital One Journey, with a credit limit of $300. I have a few questions as to how I should go about spending and paying for this card. I was originally planning on spending a large portion of the $300, then paying off my whole balance by the due date. But I am reading that I should not spend more than 9% of my credit limit, to keep my utilization rate <9%. 

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You should not exceed 30%.  10% or less is for optimization -- i.e. when applying for credit but that can be tricky when you have a CL of only $300.  Further, if you want to optimize utilization you really need 3 cards.  I don't recommend obsessing over it at the point you're at.

Restricting spend is one way of managing utilization.  Another, which tends to be popular around here is to ensure that the balance is paid down prior to the report date -- when the balance and other info is reported to the CRA's.  For most cards that's the statement date.

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@Anonymous wrote:

Or does <9% utilization rate imply I should carry a balance of less than $27 and not pay off the balance in full each month?

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You never need to carry a balance for scoring purposes.  There's an important distinction between allowing a balance to report and carrying a balance.  You can allow a balance to report and pay in full.  You can also have a 0 balance report and pay in full.  It's all about how much and when you make the payments.  Again, balance report on the report date.  Payments made after the report date but by the due date will not reduce or eliminate a reported balance as the balance has already reported in such cases.

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@Thomas_Thumb wrote:

Given you only have one credit card which is new, forget about the utilization threshold - it has no relevance for you . You are in credit building mode. The key is to show you are credit worthy. Feel free to charge up to 80% of the max credit line - but don't go to the limit. 

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I'd be careful with that advice.  Utilization isn't just a scoring factor but a risk factor as well.  80% is very high regardless of the state of credit one is in.  Short term high utilization generally isn't an issue but prolonged high utilization can get one into trouble.

[Anonymous]

I am a little confused as well and would appreciate some input.  I have a few cards and plans to make a purchase and pay them off but the one I am stuck about is my AMEX.  I wanted to use it for certain bils each month and then pay them off (so I can earn miles) my bills are due before the 5th. AMEX reports on the 7th.  Won't that make it so it ALWAYS shows a high utilzation as opposed to the charges being paid off?  Should I try to change some of my bill due dates to be afer the 7th?

Thanks.

[Anonymous]

Thanks so much everyone. Everyone has been so helpful--I really appreciate it! Yes, I'm going to start disregarding utilization rate for now, and focus on opening more CCs/increasing CLs.

[Thomas_Thumb]

takeshi74

Valued Contributor wrote:

I'd be careful with that advice.  Utilization isn't just a scoring factor but a risk factor as well.  80% is very high regardless of the state of credit one is in.  Short term high utilization generally isn't an issue but prolonged high utilization can get one into trouble.

Let me clarify my statement.

I don't mean to encourage persistent high spending as it is not necessary to demonstrate ability to handle credit. My thought was more along the line as follows for monthly utilization: 20%, 10%, 50%, 10%, 80%, 0% - then request a CL increase and if asked: "what credit line amount you are looking for?" perhaps say: I would like a CL of $750 but $500 would be enough to ----.

If there is only one credit card open to report; a high utilization on a low limit card is not unexpected. If the balance is paid in full every month the credit card company will know this when reviewing payment history. Paying in full by due date demonstrates ability to handle credit to the issuer. Ability to pay a high percentage of an existing CL in full sends a strong signal that you can handle more credit. The "pays as agreed" will show on a credit report regardless of when you PIF. However, the balance reported to the CRA depends on payment timing.

I PIF monthly according to statement just because I find it so much easier than some type of timing of payments to show a zero balance at some moment in time. Don't obsess over payment timing to show a zero balance (really it is best to show a non zero balance when you only have one card) - Key is to avoid a late payment and PIF if possible.

It is important to use credit to get credit.  

[onstar]

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@Anonymous wrote:
Thanks so much everyone. Everyone has been so helpful--I really appreciate it! Yes, I'm going to start disregarding utilization rate for now, and focus on opening more CCs/increasing CLs.

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That's good.

As long as you PIF each month, Capital One does not care if your utilization is 99%, even if you do this every single month. If you spend $299 each month then PIF by the due date each month, then there is a good chance that Capital One will give you a CLI. The only thing they really care about at this point is that you PIF each month.

Utilization comes into play when you are applying for new credit. Starting about 2 billing cycles before you apply for new credit, make sure to bring down the utilization on your Capital One Journey down to like 10% (just before statement cuts, make sure that the balance is $30). Do this for a couple billing cycles, then apply for new credit. This is so that you can artificially lower the utilization and artificially boost your credit score. It's a loophole, and a lot of people (especially on myfico and other credit boards) do it, and it is not generally frowned upon. As you corrected observed in your original post, measuring utilization like this is stupid. They should measure on the balance you carry each month not on the balance on statement day. Hopefully this will be addressed in the next overhaul.

[Revelate]

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@Thomas_Thumb wrote:

@takeshi74

@Valued Contributor wrote:

I'd be careful with that advice.  Utilization isn't just a scoring factor but a risk factor as well.  80% is very high regardless of the state of credit one is in.  Short term high utilization generally isn't an issue but prolonged high utilization can get one into trouble.

Let me clarify my statement.

I don't mean to encourage persistent high spending as it is not necessary to demonstrate ability to handle credit. My thought was more along the line as follows for monthly utilization: 20%, 10%, 50%, 10%, 80%, 0% - then request a CL increase and if asked: "what credit line amount you are looking for?" perhaps say: I would like a CL of $750 but $500 would be enough to ----.

If there is only one credit card open to report; a high utilization on a low limit card is not unexpected. If the balance is paid in full every month the credit card company will know this when reviewing payment history. Paying in full by due date demonstrates ability to handle credit to the issuer. Ability to pay a high percentage of an existing CL in full sends a strong signal that you can handle more credit. The "pays as agreed" will show on a credit report regardless of when you PIF. However, the balance reported to the CRA depends on payment timing.

I PIF monthly according to statement just because I find it so much easier than some type of timing of payments to show a zero balance at some moment in time. Don't obsess over payment timing to show a zero balance (really it is best to show a non zero balance when you only have one card) - Key is to avoid a late payment and PIF if possible.

It is important to use credit to get credit.  

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You are 100% right on that, just letting non-trivial balances report does change your FICO instant-in-time calculation.  I would also agree when just starting out there's far more important things than obsessing about revolving utilization, you only are looking to keep a couple of lenders happy at that point and can change up the metrics before you take the step into the second tier.

If you're not making an application not much really matters unless someone decides to do an AR and take exception to it (I let my balances fall wherever 90% of the time and even let a new tax lien hang out on my report for several months before getting the paperwork done, just didn't matter as I was credit idle) and once you get a large enough buffer from a limits and tradelines perspective, the calculation becomes trivialized when it comes to revolving utilization metrics; however, a lot of people aren't at that point yet.  I might be after my post-mortgage app spree, but I'm not today on 9 lines at 34K in limits with my typical card habits.

That said I run as much of my financial life as possible through credit cards and I'd really suggest everyone do the same; don't run up debt you can't simply write a check for (financing large purchases at favorable interest rates not withstanding) but I can't see ever going back to a cash-based existence as being optimal for anyone but as a last resort.

[Anonymous]

"I was originally planning on spending a large portion of the $300, then paying off my whole balance by the due date."

Excellent plan, do this! Don't worry about optimizing your utilization level until a month or two before you plan to app something else. Your plan should help persuade the CC that you can manage a higher CL.