Factors of a FICO Score: Utilization Rate

March 2007 Newsletter

- Email this article to a friend -

If you are just joining my newsletter group...Welcome. You can always request back issues for this year letters by emailing me and I will get my assistant Kim to get those out to you. (I will give my contact information at the end).

So, let’s get started. You are now well aware of what a FICO score is and why it is so important. We have reviewed the 5 most important factors that are considered in the credit score formulas are:

1. Your payment history
2. The amount of money that you owe
3. The length of time you have had credit
4. The type of credit that you have
5. How many credit Inquires

I thoroughly went through what your payment history involves and that it is very important that we change your history now… You want your scores to reflect a positive payment history; that you make your payments and you make them on time. You do not wait until the due date to mail your payment, you mail ahead of time so that it arrives and is processed by the due date. When you start paying like this your scores WILL go UP! Then, you organized your budget so that you would make the correct amount of payments on time or early every time.

This month’s letter will focus on #2 of the Important Factors listed above “How much money you owe”. This score is based on something called your utilization rate or in English what is the percentage of debt you owe. In other words, how much money do you owe compared to the total amount of credit that you have. This is not a grand total of all credit cards but each one separately.

For example- you have a $10,000 credit limit on a credit card and you spend or use $3000 total over the past few months. Then your utilization rate would be 3000/10000=33.33%.

Credit cards are called “revolving accounts”. This is not a debit card/bank card or a department store card. These are the VISA/MasterCard/American Express/Diners cards. They all report to the credit bureaus monthly. To increase or maintain your credit score your balance on any one card should never exceed 30% of your total limit. Furthermore, the more of these you have and pay on time with a low utilization rate the better.
This is why it is suggested that you have more than one revolving account, because it is better to have 2 credit cards with less than 30% utilization rate than one card at 60% utilization. Even if you pay the card that has higher utilization rate on time, your credit will not improve as much as it will if there are 2 cards with less utilization. This does not make logical sense but that is the way it goes. We are here to learn how to work within the system, not change the system!!

So, what will this tell lenders???? They believe that my keeping your utilization rate at 30% or below AND paying your payments on time you can responsibly use credit and you can pay off more than one thing at a time. It is more typical to have more than just one payment – like a house, a credit card and a car. Lenders like us to be evenly balanced!!

So, the goal is to first have some type of revolving account like a credit card and keep the usage low- below 30% of the total and pay on it each month on time. Your scores will slowly but surely improve. The extra bonus to doing this is that you will qualify for an increase in your credit limit which you can request after 6 months of consistent payments.

Beware of overextending yourself. You do not have to rack up debt to use up 30%. All I am saying is a tank of gas per month and pay it off. If you can afford more , that is fine, but figure out on your calendar how you can budget this in and add it to what you are already doing.

To recap….you want to have a LOW utilization rate. The goal is 30% or less for each credit card. You should be making payments on time or early. Credit cards will consider you late even if your postage is on the due date. The date they put as due is the date that your payment should be processed on or before. For example if the due date is February 15th then your check needs to be posted by them on the 15th or before. This is the only way your score can improve for this area.

Okay…you got one more notch on your belt. Don’t forget if you have questions or need some assistance with improving your credit call your finance specialist first and if you need more assistance they will contact me if there is anything that I can do. Your finance specialist can get credit issues solved faster than I can, but I will help if needed.

Dedicated to improving your credit and making you a home owner,

Lori Jake
EZQualDreamHomes.com
Swiftcurrent Investment Group, LLC

Privacy Policy
Copyright All rights reserved
Contact Webmaster
Website design and hosting click here
Resources