Credit limit tricks: Keep a high score while still using your card
Forget the old 30% rule, but know when your credit 'snapshot' is taken
By Dana Dratch
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
Start by throwing out the old notion about 30 percent usage
being OK. FICO, the company that originated credit scoring and is still the
largest provider of such scores, has long advised score-conscious consumers to be far more stingy about credit use. The company had told
people to keep it to 10 percent or less, says Anthony Sprauve, spokesman for myFico.com, FICO's consumer
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's chief alternative, the VantageScore, is a bit more lenient in how it
views utilization ratios. FICO counts credit usage as 30 percent of its overall
score. In the VantageScore universe, the ratio makes up about 23 percent of the
score, says Sarah Davies, senior vice president of research and analytics for
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.
There's no hard-and-fast
guideline. But I think that if people stay somewhere
between 10 percent and 20 percent range, that's a good
place to be.
|-- Anthony Sprauve
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.
your credit score
Want to keep that score as high as possible while still
using your cards? Here are four ways:
1. Use a card that doesn't report utilization ratios.
Some true charge cards (cards where the full balance is due every month) don't
report card balances to the credit bureaus. The best way to find out if
yours does: Call the card issuer, says Sprauve. And if your card doesn't report monthly card charges, you don't have to worry that using more of your credit line will
affect your score, he says.
2. Time your payment. You can appear to
be carrying a balance, even if you're not. That's because card issuers report your balance
owed to the credit bureaus on the same day every month, says Norm Magnuson,
vice president of public affairs for the Consumer Data Industry Association, a
trade association for credit reporting companies. That day probably isn't your
payment due date.
Think of it as a monthly snapshot of
your credit use. You want to look as pretty as possible to the credit bureaus
on that day. If you're carrying a $2,000 balance on the 10th of the month, when
the snapshot is taken, it doesn't matter if you pay it off on the due date on
the 15th. The report to the credit bureau will say you were using a chunk of
your credit, and that may blemish your score.
The solution: Find out what that day
is, and pay any portion over your target usage amount before then. Phone the
issuer and ask, "When do you send down that accounts receivable tape to
the credit bureau?" says Magnuson. "I don't see why they'd have a
problem with answering that. It's a straightforward question."
3. Pay your bill several times a month.
Want to make certain you're always under your usage goal while still getting
the most out of your cards? Try making payments weekly or twice a month. That will always suppress your balance, no matter when the credit bureau snapshot is taken.
But be careful: If you pay before the
statement date, it could be counted as part of a different billing cycle, says
Paul Westen, president
and CEO of TCM Bank, the card issuer for many community and independent banks. You
could still have a bill due in a few weeks, he says.
The smart move: Call first and find out
how the billing department handles multiple monthly payments, along with what
information you need to include when you pay.
Request a credit line increase. If you use a set amount every month
and want that amount to equal 10 or 20 percent of your credit line, one way to
make the math work is to increase the credit line, says Westen. "Creditors no
longer give automatic credit line increases," he says. Instead, the onus is
on the consumer to ask for more credit.
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
Published: February 22, 2013