I’m trying to lose weight, so I’m all about portion control right now.
My meat servings are supposed to be palm-size, my doctor says. Even though nuts are a healthy snack, I have to be careful about how many of them I eat. I’m counting carbohydrates to ensure I eat the healthiest kind and amount.
As I was complaining to a friend about all this measuring, she pointed out that my struggle isn’t much different than that of people trying to lose debt.
Just like I ask my doctor how many calories I should aim for on a daily basis, you need to be constantly asking how much debt is too unhealthy financially.
The latter is particularly important when it comes to your credit score. One of the factors that can boost or bust your number is the percentage of your credit limit that you’re using, or your “utilization” rate or ratio.
For a series of columns on myths about credit scoring, I asked representatives from the three major credit bureaus – Equifax, Experian, TransUnion – and FICO, the company that created the credit-scoring model used by most lenders, to address some common misconceptions. I wanted them this time to focus on folks trying to get or keep a good credit score. I asked: What percentage of available credit should people be using before it negatively impacts their credit score?
The credit-scoring algorithm looks at the utilization rate for each active individual account as well as at your aggregate credit utilization. So let’s say you have three active credit cards, each with a maximum credit limit of $5,000. Two of the cards have zero balances. The third card is maxed out with 100 percent utilization. Your overall utilization for all three cards is 33 percent.
Conventional advice has been that consumers shouldn’t use more than 30 percent of their available credit overall or even on one card. So, given the example I just laid out, should you panic?
“There is no specific threshold when utilization begins to negatively impact a FICO score,” said Can Arkali, principal scientist for FICO. However, he added, analysis has shown that consumers with very high FICO scores of 800 or above use an average of 7 percent of their available credit.
During the years I’ve reported on this issue, credit experts have repeatedly told me about the “30 percent” threshold. However, the credit-scoring models are complicated and consider much more than just a person’s utilization rate.
“Because it’s not the only factor that determines a credit score, we can’t say that simply keeping that ratio under 30 percent won’t negatively impact a consumer’s credit score,” said Jason Flemish, a vice president at Equifax. “Credit utilization also takes into account other financial commitments you have, which is why you shouldn’t always immediately close down an account that has been paid in full. Creditors and lenders prefer to see a lower ratio of how much debt you’re carrying compared with how much available credit you have on a particular account. A general rule of thumb is to pay down debts responsibly all the time, every time.”
Heather Battison, a vice president at TransUnion, also said using around 30 percent of the available credit is a good general target but that ultimately the figure varies by person.
“Consumers utilizing the majority of their available credit can appear risky to lenders who may question the ability to pay back loans,” she added.
Rod Griffin, director of public education at Experian, said people should never have a utilization rate of more than 30 percent overall or on a single card. Once you start going over that threshold, you’re entering the next level of risk, he said. It’s at that point lenders start to get concerned that you may be overextended.
Yet, he too says this percentage yardstick isn’t a magic number, and it shouldn’t necessarily be a target. “Carrying a balance, even less than 30 percent, could affect your credit scores to some degree depending on your overall credit history,” he said. “People with the best credit scores have utilization rates of less than 10 percent.”
The misconception about the 30 percent target is really about portion control. Don’t aim for that percentage thinking it’s a safety zone. If it’s financially stressful to be using even 10 percent of your available credit, then that’s too much weight for you.
But, I know. You want a percentage of utilization that is the healthiest to your credit score.
The right answer is zero. And that means paying your balances in full each month.
Michelle Singletary can be contacted at:
michelle.singletary@washpost.com
Twitter: SingletaryM
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