Credit Utilization And Good News, Bad News


From a pure budgetary standpoint it seems that it would make sense to only use one credit card. That way you will only need to make that one payment every month and that?s it. Easy peasy.

But not so fast, of course it is not that easy.

The truth is that if you have a credit limit of, say $7500 and you have used 75% of that or $5625.00 your credit score will be dinged.

But if you owe $5625 and it is spread out over 4 cards with approximately $1400.00 owed on each card with a credit limit of $7500 on each, your credit utilization on each card is only 19%, and your total credit utilization is also only 19%, your credit score will be higher even though you still owe the same amount of money or $5625.00 total.

That is because of credit utilization. See the credit bureaus basically want you to have access to credit they just will not reward you for using it. From a credit scoring perspective, you?re better off having credit but not actually using it.

In order to have the highest credit scores you need to keep your debt to credit limits ratio below about 25%. So in the second scenario, you have 4 cards with $7500 limits, making your total credit limit $30,000.00 and you have only used $5625.00 of that or just 19% of your total credit limit. Good news if you want a high credit score.

In the first scenario, even though it may be easier from a budgetary, paying bills, what?s easiest for me situation, and even though you still owe the same amount of money, $5625.00 your credit limit is just $7500 so you have used 75% of your credit limit from a credit utilization standpoint. Bad news if you are looking for the highest credit scores.

Credit utilization is a huge factor in your credit score. So think about it. In some cases it may be beneficial to spread the debt around to other cards, thereby reducing the credit utilization ratio by increasing the amount of credit you have available.