Question:
Dear Steve,
I have three credit card accounts, all with Citibank. Two of them are closed. The one open account has a credit limit of $1700. I am just $140 below the limit on it. The other two are at about 40% or less.
I am getting dinged on my FICO score as they are looking at each account individually rather than a total overall view.
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What percentage of my debt to credit limit on credit cards do I need to get to so that this is not a drag on my FICO score? I thought it was 30%, but I hear that even 25% is not good. What is the tipping point percentage on this?
Alan
Answer:
Dear Alan,
I’m sorry to hear that you have closed accounts with Citibank. But, unfortunately, closing your oldest accounts does more to drag your score down than help it grow.
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The credit reporting folks at Experian say your payment history on open accounts is about 35 percent of your FICO credit score. So the amount that you owe is about 30 percent of the credit score calculation.
Your actual credit history is far less critical and only is about 15 percent of your FICO score.
Your question is focused on credit utilization. These rates are based only on revolving credit. It does not include installment loans, mortgages, auto loans, or other lines of credit.
While your credit utilization rate is generally a percentage of total credit card credit available, what you do on individual cards also plays a significant role.
Experian provides an example and says, Let’s say you have “two credit cards with a total credit limit of $10,000, of which you’re using $5,000. Your total credit utilization rate is 50 percent. If each card has a credit limit of $5,000 and you owe $3,000 on one and $2,000 on the other, your per-card utilization rates would be 60 percent and 40 percent, respectively.”
As a general rule, your credit utilization on each open card should be below 30 percent of that card’s available credit. Credit scoring models look at each revolving account’s utilization rate and the overall rate across all accounts. In either case, it’s best to keep your utilization under 30 percent.
People with the best credit scores tend to use under 10 percent of their available credit.
On your credit card with a $1,700 limit, you will need to reduce your balance below $510 before it helps your score and keep it below $170 if you want to aim for the best credit.
Experian provides the following advice to help you with credit utilization issues:
- Remember that even if you’re not able to get completely ‘back to zero’ each month, keeping your balances as low as possible is still helping you move in the right direction and avoid racking up excessive debt.
- Keep open credit accounts with zero balances, even if you don’t intend to use them.
- Requesting a credit limit increase from a credit card issuer.
Closing credit cards harms your credit score. When an account is closed, it lowers your total available credit. Experian provides an excellent example to help people understand the damage closing accounts can do.
You have $10,000 in available credit on two cards, with a credit limit of $5,000 on each, and owe $5,000 on one. Your credit utilization rate is currently 50 percent. So you decide to close the zero-balance card, which lowers your total available credit to $5,000. Now your credit utilization rate is 100 percent!
Far too many people have the wrong information or attitude toward maximizing their credit score. Doing intelligent things for you mathematically, like closing cards, is not a good move if you want to boost your credit score and have access to lower rates.
I’m always perplexed by people who want to close all their credit cards and only use debit cards. Hopefully, that makes them feel better in other ways because it is wrong if you wish to maximum consumer protection from scams and errors or care about your credit report. Here is my rule about debit cards; they should be avoided like the plague. Nothing prevents you from paying off a credit card daily or weekly to prevent creeping debt. Debit cards don’t help your credit score either.
Credit scores and other issues surrounding money and debt are much more nuanced and complex than people assume. I think your question is an excellent example of that.
Sometimes we do what seems like the right thing only to learn the game of credit has different rules.
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Key Takeaways
- Credit utilization—debt compared to available credit—is a major factor in credit scores.
- Keeping utilization under 30% is standard advice, but under 10% is better for scores.
- Utilization is calculated at a point in time when reported to bureaus.
- Obsessing over small score changes often distracts from bigger financial goals.
- A 750 score and an 800 score get similar loan terms in most cases.
- If you're in debt trouble, worrying about score optimization is misplaced priority.
- Credit scores are tools, not measures of personal worth.
Full Transcript
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Frequently Asked Questions
How much credit card debt hurts your credit score?
Generally, keeping utilization under 30% of your available credit prevents major score damage. Under 10% is optimal. But if you're struggling with debt, score optimization shouldn't be your priority.
Does paying off credit cards immediately help my score?
It can, because utilization is calculated when reported. But don't stress about timing—the bigger picture of managing debt responsibly matters more.
Should I worry about credit score when dealing with debt?
Steve says a temporarily lower score from dealing with debt properly is better than maintaining a score while drowning. Solve the debt problem first; the score will recover.
Asked question about credit ultilization.
Thank you for your question, Alan. I made it into the podcast of the day as well.