Navigating what makes a great credit score can sometimes feel like being on the ocean during a storm. There’s a lot of people willing to give you advice and not a lot of solid information to draw from. The companies that produce the FICO score are very secretive about how exactly they calculate your scores, but they are upfront about certain things, one of them being credit utilization, or more accurately, debt-to-credit utilization.
It is widely known that there are three types of credit: mortgage, installment (cars, student loans), and revolving. Revolving limits change monthly, hence the name revolving, and are not fixed like mortgage and car loans. The consumer has a choice of how much they use from month to month, and because of this, roughly 33% of your credit depends on how you use those little plastic temptations we call credit cards.
A consumer advocate for the CFP Board of Standards, Eleanor Blayney, says that ideally, a person should use between 10 and 30 percent of what’s available to them on their total credit limit.
For example: let’s say you have one thousand dollars available to you on your credit cards (having two $500 limit lines). If you are carrying over more than $300 on a monthly basis, you are over the optimal ratio. If you carry $500 or more monthly, your ratio is 5-10, or 50%, and this is where you look riskier to the credit agencies.
Think about it for a moment, would you rather loan money to someone who barely uses the credit they have available to them or someone who is consistently using more than half of what they have available? More use looks like more risk, and this accounts for a huge portion of your FICO.
Think of it like a speed limit. Keep it under thirty, or the FICO police will cite you with their sentence of bad credit. KEEP it UNDER 30