Reader Question: Understanding Credit Card Utilization

I received two excellent questions about how exactly credit card utilization impacts credit scores. I'm impressed! A couple of years ago, I don't know that anyone actually knew that their debt-to-limit ratio had an impact on their credit scores. Here's the first question from Debbi:

1. What is the formula for credit card utilization (i.e., credit limit to account balance) to positively affect FICO score?

2. I recently became an authorized user on a credit card with a 40% utilization rate. I also have a personal revolving account that is now $30 below the credit limit of $1700. My credit scores today were slightly less than they were 2 months ago. Which of these accounts could have caused the 10 point decline in my FICO scores?

3. I understand that there are changes in the works to no longer include authorized user accounts in the FICO score. Is there anyway a lender can take advantage of this or get access to this new formula even though the change is not completely rolled out so that my FICO score would be better?

And here are my answers: 1. A total debt to total limit ratio of under 10% (but not 0%) is ideal for your credit score. 2. The high utilization on both those accounts would have impacted her credit score negatively. Remember, total utilization across all cards is the key figure. 3.  Many lenders have already started discounting authorized user accounts from their underwriting. The FICO rollout has just started, but other scoring models also offer the same no-auth formulas.

I also received a related, but different question this morning from Sam:

I have 2 Bank of America cards that are maxed out. I have other credit cards with zero balances totaling about $50k in credit limits. I am under the impression that if I spread the balances out from the 2 maxed cards across 5 cards in order to have my balances at under 50%, that will help my FICO score.

Spreading credit card debts out across multiple cards doesn't change your total credit card utilization ratio and will not help improve your credit score. It's all about the total debt vs. the total credit limit. Paying off your debts or increasing your credit limits are the only options for improvement in this category.

Any other questions about credit card utilization ratio? Send your questions by email!

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Comments

[Jake Stichler]

Thanks for this info. So, is the magic number 50%, or 10%?

In any case, you mention increasing limits. However, it has been suggested to me that this itself isn't the greatest idea, either. While it may, according to your info, help the actual FICO score, it will also show your next potential lender that you have n amount of unused, unsecure debt that you could get yourself into at the blink of an eye. Lenders aren't blind, and they don't just pay attention to the FICO score (or whatever other score they use), they do actually look at what the rest of the report says.

[Emily Davidson]

10% is the "magic" number. However, these score points are on a sliding scale. 50% is better than 75%. 30% is better than 50% and so on.

As for the limits, you have to get really high before it starts to concern a lender. I wouldn't worry too much about it unless your getting above $100k in credit limits with a sturdy income.

[k smith]

limit on card is 3000 and 1500. if balances is brought to 1500, and 750, will credit score go up/