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I am a beginner at using credit cards. [My first credit card is a month old now].

I am reading this blog post, where I came across this line about credit utilization:

if you have a $10,000 credit line on a card, you don’t want to maxing it out every month; in fact, you should ideally only be using a small percentage (under 10 percent) of your credit line.

Why so?

What is wrong with, me using 70-80% of my credit limit every month, and then paying it off in full before the due date? Why should I limit my credit usage to just 10%?


PS: I've used 43.2% of my credit limit in my first month, and paid it off in full well before the due date. Would my credit score addition be lower than someone who used 10% and paid the bills in full?

  • Which country are you in? Credit reporting and scoring work differently in different countries. – Ben Miller Jun 3 '17 at 4:45
  • @BenMiller India. But, I just wanted to know the logic behind it :) – Dawny33 Jun 3 '17 at 4:45
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    I don't know the details of Indian credit reporting, but you should be aware that the blog article you were reading is U.S. specific. – Ben Miller Jun 3 '17 at 4:46
  • If you can afford to pay off $7000 to $8000 every month, then why would your credit limit be so low? – Simon B Jun 3 '17 at 22:56
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Under the current credit reporting system in the U.S., creditors only report balances once a month. Furthermore, there is no reporting of the amount of your payment. Only the balance and whether or not your payment is made on-time are reported.

As a result, the credit report (and consequently, credit score) have only a limited view of your current financial situation.

Let's say that you have a credit limit of $4000, and you spend $3000 of that each month and pay it in full. The only thing shown in your credit report is the $3000 balance that never goes down, and the on-time payment. Your credit report would look exactly the same as someone who has run up their credit card to $3000, can't afford to pay it back, and is only making the minimum payment.

The credit utilization number is the only way for FICO to assess your financial situation based on the numbers in the credit report. It's not perfect, as my example shows. However, the thinking is that you, who have no trouble paying off $3000 every month, can easily get more credit, which would then lower your credit utilization. The guy who can't afford the $3000 payment wouldn't be able to get any more credit, and his utilization will stay the same.

It's okay to do this, but before you go crazy getting a bunch of credit that you don't really need, ask yourself if it really is important to try to maximize your credit score.

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There's nothing stopping you from using a greater percentage of your available credit - they call it a limit for a reason.

However, for your credit score, the scoring models (such as FICO), assume that the more of your available credit you use, the higher you are at risk of default. Generally, it's best to keep your utilization under 30%, and, as the blog post you reference suggests, under 10% will be even better for your credit score.

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You are asking the question the wrong way around. Of course, nothing is wrong with you using 80% assuming you know what you are doing, and can manage it well.

The problem is that others don't have all your data in detail, cannot look into your head, and cannot predict how you will behave as a payer in the future, so they have to rely on statistics.

A credit score is basically a reverse-engineering of observed behaviors and its correlation to observable data.
In plain english, and over-simplified (and made-up data): look at one million people, and check how many file for bankruptcy, and correlate it with their gender. If you find that men file for bankruptcy more often than women, give men a lower rating than women.
Repeat for any correlation you can imagine (and that is legal), and fine tune the rating difference to match the correlation strength.

As a result, the credit score is a statistical predictor for your behavior. It is not predicting how you specifically will behave in paying your bills in the future, just what the calculated risk is from the data they have about you.

Applying this to your question: people that use more than 30% of their credit frame statistically become worse payers. Therefore, they get a lower rating.

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