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2/22/2013 1:00:00 PM
Here's an axiom familiar to borrowers: Using too much of your available credit hurts your credit score. A personal finance rule of thumb that goes with it says that for a good credit score, keep your " credit utilization ratio " -- what you use versus how much you have to use -- below 30 percent. The rule applies to each card individually, and to the cumulative limits of all your cards.
So if you have a card line with a $10,000 limit, for the best credit score, don't carry a balance higher than $3,000. Simple, right?
Sorry, but no. Your credit limit has fewer hard-and-fast rules than personal finance bromides would have you think. Knowing its tricks can get you a better credit score and keep money in your pocket.
Forget the old 30% idea
More recently, the company's stance has softened he says. Its studies indicate that there is only a minimal score difference between consumers who limit their usage to less than 20 percent and those who keep it to less than 10 percent, he says.
That can be good news for consumers who want to actually use lower-limit credit cards for more than token purchases.
According to FICO surveys, credit scoring "high achievers -- those with a score north of 750 -- they're using an average of 7 percent of their available credit," Sprauve says. "I think 20 percent, for a lot of people, is more realistic. I would rather talk about that as a realistic goal that they can attain, rather than something that might feel like a stretch and out of reach."
And remember that credit scoring formulas are closer to a sliding scale than a cliff. You don't go from a great score at 20 percent credit utilization to a lousy one at 21 percent. "There's no hard-and-fast guideline," Sprauve says. "But I think that if people stay somewhere between 10 and 20 percent range, that's a good place to be."
It's still true that you shouldn't go rack up debt on any one card. The FICO scoring system looks at "the total available credit and the total balance used," says Sprauve. "But it also does look at individual lines of credit. So it factors in both."
FICO, VantageScore differences
To keep it strong, aim for using less than half of your available credit lines, says Davies.
"If you keep your balance below 50 percent, your score is not negatively affected," she says. And keeping it "below 30 percent" is smart, she adds. And, as with the FICO models, the lower your utilization (above 0), the more benefit your score can see, she says. Also, as with FICO, how much a change in the utilization rate affects the score will vary by person, depending on their individual credit history.
If you like VantageScore's attitude toward credit usage better, that's nice, but you don't get to pick which score lenders use. VantageScore is used by less than 10 percent of the lending market, says Craig Focardi, research director for the TowerGroup.
Maximizing your credit score
Utilization ratios aside, if you're paying that balance on time and in full "every month for a period of time, most issuers will have you at the most attractive rate," says Westen. If they don't, then switch cards, he advises.See related: FICO credit score's 5 factors How FICO looks at your credit use Good payment record no longer wins automatic credit increases