Your credit scores respond in real-time to your credit card balances. Charge a purchase, and see your credit score go down. Make a payment and see your scores go up. This happens almost instantly in the digital age we live in.
These incremental fluctuations through the month might be small and subtle unless (or until) you get close to maxing out any particular line of credit. Your scores will take a major hit once you start charging 80 to 90 percent of the card limit.
Example: You have a credit card with a $1,000 limit, and you consistently carry a balance between $800-$999.
Now obviously going over your limit will have a big negative effect, but consistently carrying a large balance over time has huge negative effects on your credit. Let alone paying $100’s - 1,000s in interest yearly. (The fees you pay for the privilege of being in debt.)
The 15/30/70 Rule for Credit Cards
If you want to ensure that your credit cards never work against you follow this golden rule for credit card balances.
First: Don’t EVER spend more than 70% of your available balance.
Second: Try to always keep your card balances between 15-30% of the total card limit.
Example: You have a credit card with a $1,000 limit. Don't ever charge/carry a balance of more than $700; ideally keep your balance between $150-$300.
This is especially true if you are getting ready to apply for credit of any kind. To get the best interest rate you possibly can, make sure your credit card balances are less than 30% of your total credit utilization.
When a Zero Balance can Hurt Your Score
For those folks who are thinking, “No worries, I don’t carry a balance on most of my credit cards,” guess what?? That could be hurting your score!!
If you have a credit card sit for too long without a balance this could go against your credit score. After a few months with a zero balance, the credit card company wonders why you even have that card if you’re not going to use it.
So they assume that it is your ‘emergency’ card. And when times get tough you’re going to charge it up and not be able to pay it. (And just like the stock market, financial tough times happen at some point to all of us non-one-percent-ers.)
Credit bureaus can be SO dramatic!! (Can you see my eyes rolling on that one?!)
Credit companies always want to assume the BEST of us when we open up credit accounts, and then find the silliest things to ‘suspect’ the WORST of us.
Like NOT using a credit card for a few months. How could that be a bad thing? But I found out that if the banks were to give this a letter grade like we were back in school, to have a credit card sit with a zero balance for several months, could be like a D- grade in school.
That's barely a passing grade!! So I can only imagine how that impacts scores. Because you know, NO ONE actually knows the exact metrics in the various different scoring models out there (FICO, Vantage, etc.)*
This supports one of my biggest credit arguments, that credit scores are just DEBT scores. It just seems like an oxymoron to punish someone's credit scores if they don’t carry debt month to month.
It’s because you aren’t playing their game.
“But I don’t pay interest b/c I pay my balance in full every month.”
I got news for you!! Before you go telling me how you pay your cards in full every month (although I do applaud that type of behavior with credit cards) it ISN’T helping your credit score.
If you aren’t paying them interest, you’re NOT playing their game. So while the pay in full every month doesn’t hurt your credit, it doesn’t help it either.
I say help like that because, yes if you pay all your cards in full every month, with no balance for ten-plus years this will have a benefit to your score for the simple fact of showing a long history of NO BAD activity.
My point of these last two sections is just to illustrate that it is a DEBT game, and you HAVE to play their game if you want to feel the love for your debt score.
One last thing of note for those who ‘pay in full’ every month. The max utilization rule of 70% still applies to you.
If you are charging $900 on a $1,000 balance, EVEN IF you are paying it off in full, this still has the effect of putting on 10 extra pounds after the holiday season. (I’m sure I’m not the only one, lol)
But you get the idea. While the added weight (to your debt or your waistline) isn’t going to kill you, it still certainly drags you and/or your score down. If your card balance is $900 on a $1,000 limit at the time they report to the credit bureaus (and we never know when or how often they update to the bureaus), then you are registering 90% utilization.
So while paying the balance off in full is a great financial habit, and saves a ton on interest charged; If you are concerned about your score don't EVER let the balance exceed 70% of the card limit.
If you’re in this situation, to avoid charging over 70% of your limit each month, make a mid-month payment in full. If you auto-charge your bills to one specific card for the points or perks of that card, then simply make 2 payments a month on the card.
Example: If your due date is on the 25th of every month, then get into a habit of paying that account on the 12th and 24th of every month.
This will help to keep your balances and your utilization ratio low, while still avoiding interest if that is ultimately your goal.
Oops, I Charged More Than the Available Limit?!
Let’s take the previous example. If you have a credit card with a $1,000 limit, and at ONE POINT in time you accidentally charged over the limit, let’s say it was $1,005. Your credit report will always have that $1,005 spent on a $1,000 line of credit.
Even though that over-limit charge occurred months ago (or even years ago), it's still going to drag down your score slightly.
For my credit audit clients that do not have risky habits with credit cards, this is a simple fix. We call the credit company on the account that we went over limit, and we request a credit increase.
Example: Your $1,000 credit card at one point had a balance of $1,005 (or about 101% utilization). You then get the creditor to increase the limit to $1,500 (or about 67% utilization).
Now it looks like you never overspent your card limit AND it is back under the 70% max utilization this rule suggests.
This tip isn’t for everyone. If you are being financially drained every month due to your high debt burden DON’T go increasing your card limits. First, you probably won’t get approved anyways, and second, you’ll have another hard inquiry on your credit reports.
And even if you did get approved you would only be making your situation worse not better. If your debt is becoming unmanageable, more debt isn’t the solution. You have to stop digging a deeper debt hole before you can make progress climbing out.
Things to Remember
Your credit score is really a debt score. They only care about how you handle debt, and how much more debt can they give you. If you don’t play the game you have NO score, and your score slowly drops over time the less and less you use debt.
You want to try to have all your revolving credit accounts under a 30% utilization before you go applying for any other types of credit.
Credit actually heals really quickly when you first take care of what is negatively impacting your score, and then sticking to this rule can turn around awful scores quicker than you would think.
*Situations vary from creditor to creditor or from state to state.
**Disclaimer: This content is for informational purposes only. All materials and information do not constitute financial advice. Always consult a financial professional before making financial decisions.
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Author: Kyra Jones
Debt collector turned financial coach. Demystifying debt collections.