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I've heard and read that high utilization of credit hurts, but what does that mean exactly? Does that mean high utilization month-to-month, or simply high utilization at all, even when paid off in full at the end of the month?

Scenario: At the beginning of the month, you make a purchase that is 70% of your credit. Supposing that you don't use the credit card for the rest of the month and you have the cash to pay it off, does it matter when you pay off the credit card? Immediately or at the end of the month?

Does the length of time of that high utilization, even within one month, affect your credit score/limit? Is it simply the fact that you used that credit at all an issue?

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Some people are paranoid about day-to-day or month-to-month fluctuations in their credit scores, perhaps because they have signed up with various on-line services that monitor their credit scores and promptly report any changes.

Suppose your credit limit is $5000 and you charge $3500 (70%) on the card each month for several months in a row and pay the full balance promptly every month; maybe even on the day the monthly statement is issued. Yes, it may "look bad" to the reporting agencies and affect your credit score negatively since the agencies cannot tell the difference between your actions and those of someone who charged $3500 once and is paying just enough each month to keep the balance at $3500. But, your credit card company knows the difference between you and the other guy, and believe me, the company would far rather have you as a customer than the other guy. Since the credit-card company charges the merchants fees (anywhere from 1% to 5%) for processing the transactions, they earn far more from you than the other guy, and have comparatively little risk of having to turn over the account to a collection agency. You will likely get an increase in your credit limit without even asking for it in a few months. They want to keep you rather than lose you to a competing offer from another credit-card company.

Of course, as in all cases, YMMV.

  • Interesting. That has definitely not been my experience. My current credit card (that I won't be using soon) has a limit that has actually gone down significantly for me even though I've never missed a payment on any credit or loan. Here's hoping my new card will be easier to work with. – Miles Apr 18 '12 at 15:44
  • @Miles The decrease in your credit card limit (as opposed to your credit score might be due to other factors. Note that Steven's answer says "Overall 30% of your credit score is based on credit utilization/amount owed, according to Fair Isaac." So credit scores are affected by other factors too; not solely credit utilization. – Dilip Sarwate Apr 18 '12 at 15:53
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    +1 - a nice answer, but I'm not sure what they prefer. They certainly make money charging 18% on balances, but your point is well taken, as a heavy user paying in full, they get 2%+ in transaction fees from my use, month after month. – JoeTaxpayer Apr 18 '12 at 17:45
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    Thanks, Joe. Just a minor point, it is 18% per year and so 1.5% per month on accounts that don't pay off in full each month, and a fair possibility of loss if the account is sold to a collection agency. If I were running a credit-card company, I would prefer your heavy use and on-time payments over a one-time charge that is being "paid off" in minimum monthly payment. – Dilip Sarwate Apr 18 '12 at 18:02
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Timing matters. I wrote an article Too Little Debt, in which I showed (with Steve's chart from Credit Karma) that by paying my card in full before the statement date, I got dinged that month for zero utilization. My advice is that if you wish to utilize over 20% of your credit in a given month, make partial payments during the month, just don't let the statement get cut with zero use. To be clear, the card issuer reports the statement amount each month. You can have a $5000 line, charge $4000/mo, never pay a cent in interest, and have a "D" rating on the report card. It's a game, these are the rules. You can play, or not. You can even note the absurdity, you just can't change the rules.

  • I am amazed the penalty for ~0% was similar to 40%! – MrChrister Apr 18 '12 at 17:48
  • @JoeTaxpayer so to be clear, your advice is that if you have a $4000 purchase to make and you want to put it on your card that has a $5000 limit, pay that $4000 in increments on your card if you can? Or do you mean purchase the $4000 item on your card at the beginning of the month, then every week pay off a thousand of it, leave $1000 on it when the credit card issues a statement, and then pay off the last $1000? Could you maybe clarify your advice with an example? – Miles Apr 18 '12 at 20:23
  • @MrChrister - Agreed. For me, amazed that there's no distinction between the guy owing $4000 @ 18% paying min payments and the pay in full crowd. My average CC spend is $4000 or so, but there are times we can go much higher. I needed to line up $50K in available credit to keep utilization low. – JoeTaxpayer Apr 18 '12 at 20:26
  • @Miles - I mean that you need to have the bill get cut with $1000 or less. Paying $3000 the day before the bill is cut is what would work. – JoeTaxpayer Apr 18 '12 at 20:28
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Credit card utilization is basically the sum of the monthly balances of all cards that report to the credit agencies. The amount is reported even if you pay it off in full each month: whether you are just carrying a balance or making large purchases and paying them off each month, it will look the same.

This has two notable results:

  • From just looking at your credit report, you can't tell the difference between carrying a large balance and making small monthly payments, or making large purchases and paying it off each month. This can work for you or against you but generally high credit utilization is bad for your credit score.
  • You can keep your credit utilization in the 1-20% range (some people say this is the sweet spot for your credit score) by making small purchases each month and then paying off your balance.

Here is a graph from Credit Karma that shows how credit utilization affects your score. Overall 30% of your credit score is based on credit utilization/amount owed, according to Fair Isaac.

chart of credit score impact vs credit utilization

  • Well that kind of stinks. It's nice to get rewards for bigger purchases on a card, but even if you pay it off in full at the end of the month, it's hurting your credit substantially. – Miles Apr 18 '12 at 14:29
  • Follow up question: you said "cards that report to the credit agencies." What kind of cards don't report to the credit agency? – Miles Apr 18 '12 at 14:31
  • One big caveat to this is that even if you pay it off every month, your card may report prior to your payment date. In your question you could make a purchase on the 1st with your payment due on the 25th. The Credit card company could send details to the credit reporting agency on the 20th, showing that you are at a 70% utilization (even though you paid in full). – Scott Apr 18 '12 at 14:37
  • @Miles: You can always ask for credit limit increases. If you are a big spender, they will cater to you more. No big deal though: your credit score only matters when you need to apply for loans etc, so you can just pay the cards down then. As for which cards report, AFAIK all big name cards report. But I think some smaller card organizations don't, like those department-store "credit" cards that are not actually Visa/MasterCards. – Steven Apr 18 '12 at 14:39
  • @Scott, that's good to know that paying off a large purchase immediately won't be as hurtful, however Steven made it sound like even if you pay a large purchase off immediately, the sum amount of what you put on a credit card on a month (paid off amounts and still standing amounts) is reported. – Miles Apr 18 '12 at 15:09

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