cancel
Showing results for 
Search instead for 
Did you mean: 

Understanding Credit Utilization Impact on FICO Score

tag
Anonymous
Not applicable

Understanding Credit Utilization Impact on FICO Score

Hi Everyone,

I would really like some help understanding 1) how credit utilization rates systematically effect FICO scores and how these rates can be leveraged to improve FICO scores.  In my case my scores are EQ-674, TU-709, EX-704. My info is

-Short credit history of 11 years
-24K credit limit on two cards
-Usually keep my credit utilization under 30%
-no mortgage, student loans or major monthly payments on a vehicle etc.
-no collections history

I'm not going to be applying for new cards, or starting a mortgage or any other major activities in the near term so as far as I know the only real tools I have to positively effect my score are 1) Time 2)  to pay bills on time and 3) to keep a low credit utilization rate.  My main issue is that my score keeps on taking HUGE hits everytime I pay off small balances on my credit card.  For example today I paid of $240 on my  total credit card balance of $240 and as soon as the payment hit my credit card account and this info was sent to the big 3 agencies my TU score plumetted18 points from 709 to 691!  Why am I being penalized for keeping a low credit utilization under 1% and then paying off my credit card. Is the moral of the story never to pay off your card in full?? I was actually trying to do this by leaving $1 unpaid on the card but I flubbed this as my in full payment hit my credit card account, before some other incoming charges posted to my cerdit card.

Anyways I would appreicate any tips on how I can still use my low credit utilization in my favor and avoid these 18-25 point hits for paying off my low balances.  I just don't want to incur any interest so I would rather pay off the bills. Its a catch 22 though b/c when I do pay of these low balances I am consistenly penalized for doing so. Help!

SIncerely,

Stuck at 710-670

Message 1 of 7
6 REPLIES 6
Anonymous
Not applicable

Re: Understanding Credit Utilization Impact on FICO Score

FICO doesn't like it when all of your cards report $0 (at the same time).  There is a score penalty for that.

 

But it's easy to always have a card reporting a balance and still pay $0 interest.

 

To make this an easy example, suppose both cards have their statements print usually around the 3rd of the month.  The "amount owed" at the top of the statement will get reported to the three bureaus.  You then have about 25 days to pay it.

 

Suppose your statement has $60 on it and you typically spend $50-70 each month on that card.  On Feb 3 or 4 the CC issuer will report $60 to the bureaus.  Pay that amount exactly ($60) in the next week or two.  That prevents you from paying interest.  As long as you charge at least a few dollars during Feb 3-28, then when the March 3 statement prints your card will still have a positive balance.

 

FICO will like it best if:

 

*  At least one card reports a balance

*  All cards have an individual utilization < 29% (each card considered by itself)

*  Your total utilization is < 8.99% (all credit limits combined).

 

You can pick up a few more points by having one card report $0 and the card report a positive balance, though frankly I wouldn't worry about it.  Even if your total utilization goes up to the 20s it isn't a big deal if you are not planning to apply for anything.

Message 2 of 7
SouthJamaica
Mega Contributor

Re: Understanding Credit Utilization Impact on FICO Score


@Anonymouswrote:

Hi Everyone,

I would really like some help understanding 1) how credit utilization rates systematically effect FICO scores and how these rates can be leveraged to improve FICO scores.  In my case my scores are EQ-674, TU-709, EX-704. My info is

-Short credit history of 11 years
-24K credit limit on two cards
-Usually keep my credit utilization under 30%
-no mortgage, student loans or major monthly payments on a vehicle etc.
-no collections history

I'm not going to be applying for new cards, or starting a mortgage or any other major activities in the near term so as far as I know the only real tools I have to positively effect my score are 1) Time 2)  to pay bills on time and 3) to keep a low credit utilization rate.  My main issue is that my score keeps on taking HUGE hits everytime I pay off small balances on my credit card.  For example today I paid of $240 on my  total credit card balance of $240 and as soon as the payment hit my credit card account and this info was sent to the big 3 agencies my TU score plumetted18 points from 709 to 691!  Why am I being penalized for keeping a low credit utilization under 1% and then paying off my credit card. Is the moral of the story never to pay off your card in full?? I was actually trying to do this by leaving $1 unpaid on the card but I flubbed this as my in full payment hit my credit card account, before some other incoming charges posted to my cerdit card.

Anyways I would appreicate any tips on how I can still use my low credit utilization in my favor and avoid these 18-25 point hits for paying off my low balances.  I just don't want to incur any interest so I would rather pay off the bills. Its a catch 22 though b/c when I do pay of these low balances I am consistenly penalized for doing so. Help!

SIncerely,

Stuck at 710-670


The only moral to the story is not to let all your credit cards report a zero balance; let one of them report a small balance and you'll be golden.

 

I.e. pay all but one of them off BEFORE the statement hits, and the tiny one that reports pay off AFTER the statement hits.

 

No interest. Interest on purchases only comes from carrying balances -- i.e., not paying a statement balance before the due date.


Total revolving limits 569520 (505320 reporting) FICO 8: EQ 689 TU 691 EX 682




Message 3 of 7
HeavenOhio
Senior Contributor

Re: Understanding Credit Utilization Impact on FICO Score

You can follow the AZEO (all zero except one) method if you'd like. That's to allow one card to report a very small balance with the other card reporting zero. That'll maximize the utilization portion of your score. Make sure that the small balance is at least $5. That'll prevent a small balance waiver, which occurs when a balance is so low that the card issuer doesn't bother to bill you. When that happens, the card will report zero.

 

But as stated above, unless you're about to apply for new credit, your scores are in a spot where they're not a big deal. If someone were in the low to mid 600s, you might see it suggested to aim for AZEO almost all the time.

 

The biggie is to understand why your score fluctuates. If you know the cause, that eliminates the frustration.

Message 4 of 7
Anonymous
Not applicable

Re: Understanding Credit Utilization Impact on FICO Score

Thanks Credit Guy,

That was a really helpful response.  That really clears up alot!  I will start using this method.

Message 5 of 7
jamie123
Valued Contributor

Re: Understanding Credit Utilization Impact on FICO Score

You really need to consider adding a few more credit cards. You have what is considered a very thin file by having only 2 credit cards and that will always cause volatility in your scores.

 

You are actually leaving points on the table every month by not having a minimum of 3 credit cards. FICO nicks points if all cards report a balance of $0. FICO also nicks points if 50% or more of your cards report a balance. You cannot win that scoring factor by only having 2 cards. You are currently getting nicked points one way or the other.

 

If you want to be conservative, I would suggest adding 1 card per year until you have a total of 5 cards. Pick a card that has a good sign up offer like 0% interest for 12 months or extra points if you spend $X in the first 3 months. This way you can earn a bit of money for your efforts and build a thick credit file along the way. It will also help your UTI by adding another credit line to your total credit available which will help to keep UTI lower.


Starting Score: EQ 653 6/21/12
Current Score: EQ 817 3/10/20 - EX 820 3/13/20 - TU 825 3/03/20
Message 6 of 7
Anonymous
Not applicable

Re: Understanding Credit Utilization Impact on FICO Score

I agree with Jamie.  The other thing you should include in your plan (because you have no loans or any other installment accounts) is implementing the Share Secure Loan Technique.

 

The lender we used to recommend for the SSLT is Alliant.  They stopped offering SS loans in January, but the folks here on the forum are looking for a few good alternatives

 

A reasonable plan would be to first implement AZEO.  Wait until you are sure that the new balances have appeared on all three bureaus.  Then pull your FICO 8 Classic scores (Credit Check Total will give you them for $1).  If your scores are still in the 600s or very low 700s, that means you lave lates or other derogs, which you should work with the people in the Rebuilding forum to address.

 

When your scores are higher, apply for another card.  By April we should have some reliable alternatives to Alliant for the SSLT, so if you still have only two cards in April/May, you can implement the SSLT first and then apply for your third card in the summer. 

Message 7 of 7
Advertiser Disclosure: The offers that appear on this site are from third party advertisers from whom FICO receives compensation.