Hi. My name is John Ulzheimer, and I'm a credit expert who contributes to
Creditcardinsider.com. Today's question actually came from a comment
on YouTube from one of Credit Card Insider's other videos. So please feel free to
submit questions
in the comments section of these videos. Today's question is this...
I've heard that a utilization ratio has to be 1%
or higher to have any kind of effect, positive or negative, on my credit score.
Is that true? Is it also true that paying
my bill in full by the statement date
therefore leads to a 0% utilization ratio and
will that or will that not help my credit score?
Let's break it down and get a
some succinct answers to the different components. First off, utilization ratio,
let's talk about what that is.
Credit scoring models consider
the amount of your credit card credit limit that is actually being used in the
form of a balance. And that's commonly referred to as utilization.
Some people also call it the debt to limit ratio. And what you do is you divide
the balance on your credit card by the credit limit on the credit card.
and that yields a percentage. And that's the percentage of your credit limit that your currently
using.
That percentage is very important not only in your FICO Score, but in your VantageScore.
So in all credit scoring systems
that's an important component. The higher that percentage
the lower your scores going to be. And that's just a fact. You want that percentage to
be as low as possible.
So for example on a credit card with a $10,000 limit, if you got a
$9,000 balance,
you are 90% utilized on that card. That is bad news.
However if you have a $1,000 balance on that $10,000 card
you're only 10% utilized and that's considerably better.
So there's this whole issue of what's better, 0%, 1%, or something else.
I can tell you that the
consumers in this country who have the highest average credit scores, 780 or
higher
have an average utilization of 7% percent,
which means that they've got very low balances relative to their limits and
they're actually accomplishing this
one of a variety of ways. They either have a lot of credit cards
that are unused and therefore you have a
ton of a credit limits to help keep that utilization ratio very low
or they just simply don't use credit cards that often.
Or they go online and pay their bills before it even gets to the statement.
And therefore what shows up on their credit reports is very very low relative to the limit
There is a
reality that actually almost comes across as a myth sometimes...
that if you have a 1% utilization ratio you're actually gonna
earn more points in your credit score than if you have a
0% percent ratio. That is actually true. As comical as that sounds,
that's actually true. However it's very very difficult to actually
nail that 1% because you have to charge enough on your credit cards
have that amount show up on your credit report, and that has to equal 1% of
your aggregate credit limits. It's a very very difficult thing to accomplish
I do not suggest it at all. What I actually suggest that you
is to go one step further and pay it in full.
And not by the due date; pay it in full by the date called the statement closing date.
The statement closing date is different than the due date.
The due date is actually 21 days after
the statement closing date, and it's the date that most people refer to when they
think about paying their credit card bills. The statement closing date is actually the
end up the 30 day period where you are
making charges. So there's always this 30 day window when charges are
recurring. And when that 30 day window ends
the balances and charges from the prior 30 days
are aggregated and that's what goes on your statement. That date is called the statement closing date.
If you're able to go online and make payments on your credit card bill,
so that when the statement closing date hits, the balance is actually
0. Then 0 is what's going to show up on your credit reports and that's also gonna cause you to
have a 0% utilization ratio which is fantastic for
your credit scores. If you have any other questions pertaining to credit
or other financial topics, then please submit them to Creditcardinsider.com
or in the comments section below. Thanks a lot for watching!
Have a great day!