Managing Credit Utilization

What’s Real and What’s Not

Hot credit: credit utilization gone overboard?Here in Silicon Valley things are booming. Our economy is experiencing growth. Home prices are surpassing historical records and the unemployment rate is low. You can see the frenetic energy every day — clogged freeways and expressways during our daily commutes and workers spending long hours tied to their desks.

With our economic upswing, are we using our financial success to pay down debt and use our credit wisely?

According to the Wall Street Journal, our credit card debt is nearing $1 Trillion. That’s still below the peak experienced in July 2008 at $1.02 Trillion. Banks are pushing plastic, benefiting from low delinquency rates and hoping that profits will increase as interest rates rise. Outstanding balances are up 6% from last year. Even so, some consumers remain cautious about spending.

Hurry-buy-moreIf you’re finding that your outstanding credit card balances are increasing, you may have growing concerns about credit utilization and how it affects your credit worthiness and credit score. In the past, there was a general rule about avoiding the 30% credit utilization threshold. Barry Paperno, a credit scoring expert and consumer affairs advisor for FICO (a major credit reporting agency) wrote an in-depth article that the 30% is actually a myth. Here is the Reader’s Digest version:

  • There’s not a one-size-fits-all approach to utilization. Utilization ranges may have different points assigned for individuals, taking into account combined account percentages.
  • The lower your utilization percentage across all debt-related accounts, the better impact to your credit score.
  • Having some utilization is better than zero as it indicates your behavior toward credit usage. You want to demonstrate you can manage your credit wisely.

Common Sense Trumps Credit Utilization “Rules”

The one thing I’ve learned in my years as a Daily Money Manager is that common sense trumps ever-changing financial rules. Credit scoring software algorithms change. Managing your financial situation and goals evolve. I agree with Mr. Paperno’s advice:

  • Pay your debts on time. Chronic late payments can quickly undermine your credit score.
  • Manage your debt. Balances that push the limits of available credit send warning signals to credit card companies.
  • Apply for new credit only when needed. There’s a delicate balance between limited credit and having too much. If you’re trying to build or rebuild your creditworthiness, be strategic when you apply for and open new accounts.

What’s your attitude toward credit? Has it changed over the years?

 

Photo credit: frankleleon, John Henderson

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