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URL:  https://boards.fool.com/me-neither-i-was-quite-aware-that-utilization-of-34278164.aspx

Subject:  Re: Ever heard of the 30% rule? FICO Date:  8/21/2019  3:16 PM
Author:  aj485 Number:  312594 of 312704

Me neither.

I was quite aware that utilization of credit above 10% (not 30%) impacted your credit score negatively.

Apparently the FICO score system includes a rule of thumb "keep the amount of revolving debt below 30% of available credit".

The above article says, though, that the debt to credit ratio begins to affect the FICO well before the level reaches 30%. It mentions 7%.


Interesting to hear that 7% is the new 10%, since what's been on this board for years is to keep your credit use below 10% As an example, here's a thread from 11 years ago where the 10% recommendation was made https://boards.fool.com/close-credit-card-or-leave-open-2691...

How do people get a FICO of 850? If you want a score above 800, pay attention to this "rule of thumb"? Perhaps ask for a limit increase such that the amount of monthly charges (that I always pay off) is less than 7%?

First, you have to choose the right model to look at your score on. I have lots of different options - 2 banks that give me periodic score updates and several different credit monitoring sites that also offer free scores. According to one of my banks, my score is currently 843. It's never been lower than that in the past year, and was 850 for 2 of those months. According to the other bank, my current score is 823, and has pretty steadily increased from the 796 it was when I started using their app about a year ago. The big difference? The bank that scores me higher uses a FICO scoring model, while the bank that scores me lower uses a Vantage scoring model. Here's a pretty good explanation of what the differences are https://www.thebalance.com/fico-score-vs-vantagescore-961144... Depending on your credit habits, you may well score better using one model than the other model.

I generally keep my credit card utilization around 2% - 3% of my total credit limit, and try not to go above 10% of the limit on any single card in any particular month. I also:
- pay every single payment on time
- pay off my credit cards completely every month
- limit credit inquiries
- have a mix of different loan types (general use credit cards, 1 store credit card, mortgage for my house and mortgages for rental properties; my car loans have all dropped off my score (more than 7 years old) but when they were counted, they also helped improve the mix)
- think about the impacts for opening new accounts before I apply for them, and make sure that I consider that the negative impacts (credit inquiry, decrease in average account age, 'new account' impacts, etc.) are going to be more than offset by the positives (additional credit limit, rewards for new account, etc.)

If you need to use more than 10% of your credit limit on a monthly basis, but you still pay off your cards every month, you can get into the habit of paying off your credit card balances each week, instead of each month. That way, the maximum balance that will be reported will be lower, so it will appear that you are using less of your credit limit. From a credit scoring perspective, that's probably a better option than asking for a credit limit increase, since the inquiry to increase your credit limit will negatively impact your score for up to 2 years.

The article also says 60% of Americans carry a balance on their credit cards. Therefore, 40% do NOT.

Therefore, those "average credit card debt" FUD stories are based on skewed numbers?


Well, for the 60% of people that do carry balances, their average is greater than the overall average. So, I'm not sure that it's "FUD" for them - it may actually be understating their problem(s). That said, averages can ALWAYS be skewed by instances at the extremes. Consider a population where 1 person carries $100k in debt, 4 people each carry $50k in debt, 55 people each carry $10k in debt and 40 people pay off their cards every month, so they carry no debt. 60% of the people are carrying debt and 40% aren't. The total debt is $850k, so the average is $8,500 - a lower debt total than any of the people who are actually carrying debt. So, it's certainly not "FUD" for those who are carrying debt, although it's probably "FUD" for those who pay off their balances every month.

Even if you look at just the 60 people carrying debt, the average debt is $14,167. That is a little higher than the balance of the people carrying $10k in debt - but not enough so that I would say it's "FUD" - it's still in the same ball park. And it's certainly not "FUD" for the people who are carrying $50k or $100k - their balances are still way higher than the average.

Some portion of that 60% carrying CC balances, is now over due on their CC payments, some are 90 days past due, and the article says the number that are 90 days past due has "ticked up".

Yes, the delinquency rates have increased recently. But they are still lower than historical rates https://fred.stlouisfed.org/series/DRCCLACBS

AJ
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