This has been debated over and over again on here and all over the web. It all comes down to your personal situation and what works best for you. If you're hawkish with your scores and have a particular financial goal in mind whether to score the hottest card on the market or planning for a mortgage a couple of years down the road. To understand it though we have to figure out the deifinition that FICO is scoring on.
To calculate its score, FICO looks at five different factors:
- How you've handled credit (otherwise known as your payment history). (35%)
- Your credit utilization ratio -- how much total debt you have versus how much credit is available. (30%)
- Your length of credit history. (15%)
- How much new credit you have. (10%)
- Your credit mix -- the variety of loans you have. (10%)
Credit utilization components
The credit utilization category has six subcomponents:
- The amount of debt still owed to lenders.
- The number of accounts with debt outstanding.
- The amount of debt owed on individual accounts.
- The lack of a certain type of loan, in some cases.
- The percentage of credit lines in use on revolving accounts, like credit cards.
- The percentage of debt still owed on installment loans, like mortgages.
FICO's scoring model gives a different weight to each of those factors: Credit utilization accounts for nearly a third (30 percent) of a FICO score, making it a very important factor for borrowers to understand.
So, looking at the 6 components of Utilization there's much more in play than just a balance to limit ratio. Taking a look into these is what cause the discussion as they can be interpreted differently with experience. So, the ones that stick out to me regarding the OP and CC's would be:
- The number of accounts with debt outstanding.
- The amount of debt owed on individual accounts.
- The percentage of credit lines in use on revolving accounts, like credit cards.
There are additional reasons why a single one-size-fits-all utilization percentage cut-off cannot realistically apply to credit scoring and why that’s OK:
- A particular utilization range may have points assigned differently for individual cards than for combined account percentages. For example, your score might change when utilization on an individual card reaches a certain percentage range, yet it might not change when the average of all your cards combined hits that same percentage or range.
- Utilization ranges and points that apply to one person’s credit experience may not necessarily apply to a different set of experiences. That’s due to the "multiple score card" system, by which credit scores use different scoring factors and different weighting of the factors for different sets of credit experiences. Furthermore, the same set of utilization measures might not always apply in the same way to the same person, as the indicators of credit experience, such as length of credit history, number of accounts, payment history, etc., change over time.
- Whether talking about utilization or any other set of credit scoring factors, we should never expect to see actual numbers, such as 30 percent, since this level of detail would only be meaningful when actually calculating scores, which, of course, requires much more information and analytical ability than any nonmathematician without access to credit bureau data and proprietary scoring formulas can be expected to have.
Now with this information taking the eagle eye view of combined limits utilization of 10% or less comes into play depending on how your limits look and if you favored a card for bonus / points / cashback / trying to make it grow with time and use. Personally I focus on each individual limit rather than the overall limit of them combined. I set a mental limit of 10% of the individual limit and auto PIF each month and don't chase the statement date at all. Does it work? For some it will and some it won't as it's subjective to each person on how they want to manage their spending each month. For me it has resulted in exponential growth in limits, higher scores (830's), and simplified budget planning.
Forget the old 30% idea
Start by throwing out the old notion about 30 percent usage being OK. FICO, the company that originated credit scoring and is still the largest provider of such scores, has long advised score-conscious consumers to be far more stingy about credit use. The company had told people to keep it to 10 percent or less, says Anthony Sprauve, spokesman for myFico.com, FICO's consumer website.
More recently, the company's stance has softened he says. Its studies indicate that there is only a minimal score difference between consumers who limit their usage to less than 20 percent and those who keep it to less than 10 percent, he says.
That can be good news for consumers who want to actually use lower-limit credit cards for more than token purchases.
According to FICO surveys, credit scoring "high achievers -- those with a score north of 750 -- they're using an average of 7 percent of their available credit," Sprauve says. "I think 20 percent, for a lot of people, is more realistic. I would rather talk about that as a realistic goal that they can attain, rather than something that might feel like a stretch and out of reach."
Fun little tidbit of information I came across while looking for more reference points:
(though not as much as the record holder in the Guinness Book of World Records, who has 1,497 cards with a $1.7 million credit line and nearly perfect credit).
I think we have someone here shooting for that goal sitting at north of 800K inavailable credit which just seems rediculous but, hey.... someone's gotta do it I suppose.
If you're bored and looking for more insight into all of the catagories take a read here:
http://www.bestcredit.com/credit-ratings-advanced-strategies-for-fico-scoring/
