Why this “rule” about using credit cards could cost you


If you are hoping to get the best terms on a loan available, standard credit card use guidelines may affect your plans.

The general advice is to keep revolving debt below 30% of your available credit so that your so-called utilization rate doesn’t affect your creditworthiness. However, experts say your FICO score – which many lenders use in their decision making – is well below this threshold.

“Anything over 5% will lower FICO scores,” said Al Bingham, a credit expert and author of The Road to 850.

Exactly how much depends on a variety of factors including how long the accounts were opened, Bingham said. Regardless, if your usage rate climbs to 30%, your score will continue to drop – and not suddenly drop at this recommended ratio.

“The actual drop in scores varies a little from person to person,” Bingham said. “Those who have a lot of depth in their credit report are not going to see the same decline as someone who only has one.” [newly opened] Credit card.”

The world of credit scoring is complicated.

But as many consumers know: the higher your score, the better terms you can get for loans and Credit cards. The lowest rates are generally reserved for those with a credit score of 750 or more, although sometimes it is 760 or even 780 depending on the type of loan and terms.

The best-known scores among consumers are FICO – which has existed since 1989 – and VantageScore, a joint venture between the country’s three largest credit bureaus: Experian, Equifax and TransUnion. It was founded in 2006 as a competitor to FICO.

The most popular versions of both result in a number that falls on a scale of 300 to 850. However, the specific algorithms used to get to yours vary. This means consumers may have a different score than a lender (roughly 90% use FICO scores in their decisions). A FICO score can even differ from one credit reporting company to the next for the same person.

And while your credit utilization is just one item that adds to your score, the idea that anything below 30% is acceptable might do some consumers a disservice.

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“There’s nothing significant about a 30% revolving load – it’s relative,” said Can Arkali, senior researcher, analytics and score development at FICO.

Arkali said that while there are “no hard and fast rules” for an ideal loan utilization ratio, FICO research shows that the 25% of consumers with the highest score – those with a score above 795 – use an average of 7% of their credit limit.

Additionally, most top-rated consumers owe less than $ 2,500 on revolving accounts, according to myfico.com. (In some cases, having a low usage rate will have a more positive effect on your score than not using your available credit at all, Arkali said.)

Maximizing one card could hurt your score even if the others are on low usage.

Rod Griffin

Director of Consumer Education and Awareness at Experian

Of course, lenders typically also weight additional elements, including income, length of employment, stable housing, or other aspects of your financial life that are not shown on your credit report or shown in your score.

To illustrate the difference that interest rates can make, a $ 200,000 mortgage would accrue about $ 123,000 in interest paying 3.5% over 30 years. Just half a percentage point higher, 4%, would result in about $ 143,500 in interest paid over the same period – $ 20,500 more. And at 4.5%, the interest would be more than $ 164,500 – $ 41,500 more than at 3.5%.

It’s also worth noting that just having a relatively high balance on a card can hurt your score more than you might think.

“Maximizing one card could hurt your score even when the others are under low usage,” said Rod Griffin, director of consumer education and awareness for Experian.

He also said that if you exceed the 30% usage rate, your score will drop faster if your debt continues to grow.

From a personal finance perspective, the recommended limit could be a great way to keep your plastic usage down. US households have nearly $ 1.1 trillion in total credit card debt, according to the latest Federal Reserve data.

“It encourages people to keep their debt levels manageable,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling. “It also ensures you have room to cover unexpected expenses.”

At the same time, however, it can get expensive to carry funds from month to month – which around 60% of consumers do.

The average credit card interest rate is 17.3%, according to CreditCards.com. A decade ago it was about 12%.

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