Credit Building Tips - Credit Card Utilization

Credit card utilization, the ratio of what you owe on your credit cards to your credit limit, plays a major role in the calculation of your credit rating. According to FICO(R), the creators and maintainers of the FICO credit score model, it’s 30% of your score. Do a brief Internet search and you will find most experts touting the rule that keeping your credit utilization under 30% will maximize your score. Well, that’s not exactly true.
Why Credit Utilization is so Critical to your Credit Score
Being punished for high credit utilization may seem counter-intuitive: why would lenders give you a certain credit limit and then punish you when you try to use it? But that’s exactly what happens. In hard numbers, credit utilization makes up 30% of your credit score. As a comparison: your payment history makes up 35% of your score, the average age of accounts is 15%, the mix of credit is 10% and the amount of new credit that you have is 10%.
So why does credit utilization make up so much of your credit score calculation? Higher rates indicate danger:
• The bigger your debts, the less likely you will be able to repay them.
• Lenders also feel that someone who hits their credit limit each month or even goes over them does not demonstrate financial prudence.
• Lenders get nervous when you’ve used your credit limit because if you had the money to pay down your bills, you wouldn’t have to keep borrowing more money.