Monday Mailbag: What is the Correct/Best Credit Utilization?

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Question:

I signed up for your service but, what else can I do to help increase my credit scores myself?

 

Answer:

Aside from the derogatory information reporting in your credit reports, which we will work on, the biggest reason for your scores being as low as they are is your high credit card utilization.

According to FICO, 30% of your overall credit score is calculated from the credit utilization on your credit cards – which is the balance to credit limit ratio.

Most lenders recommend keeping your credit utilization under 30% of your credit limit – meaning that if you have a credit card with a $1,000 credit limit, your balance should not exceed $300.

FICO doesn’t give us an exact ratio for proper credit utilization but, they give us 2 guidelines;
1. Keep your utilization as low as possible.
2. Keep your utilization above $0.

We also have some statistics provided by FICO on what they call their “High Achievers”, which are consumers with FICO scores of 780 or higher. According to FICO, the average credit utilization percentage for these high achievers is 5.8%.

Now, we’re not telling you to pay your balances down to 5.8% right away but, do your best to work on paying down your credit cards as low as you can (without paying them off completely).

If you can get the balances down to a 30% utilization – great!
If you can get the balances down to a 20% utilization – even better!
If you can get the balances down to a 10% utilization – you’re a rock star!

The more you pay down your credit cards, the higher your credit scores will be.



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