• How Much You Owe: Credit Score Utilization

    How Much You Owe: Credit Score Utilization

    January 25, 2009

    The second largest part of your credit score is how much you owe.  It is defined as utilization and equates to 30% of your credit score.  The reason for such a large weight in your credit score is because lenders find that people that owe or more specifically close to their limit are a increased default risk.

    The actual calculation for utilization is to take the total amount owed and divide it by the total credit limit.  This is done as a whole and by each account.  So you will have an individual account utilization and a overall utilization.

    A common misunderstanding is your utilization is found by what shows up on your credit report and not done a day to day basis.  Your credit score is a snap shot based on your credit report.  If you pay a bill and it has cleared with your account or it is not reported to the credit bureau it will not be counted when calculating utilization.  It doesn’t matter if you just completely paid off the account it will not be counted towards lower your utilization.  If you did do something like this it would be best to wait till it is reported to the credit bureaus and then check your credit score.

    MyFICO reports that :

    Nearly 37% carry more than $10,000 of non-mortgage-related debt as reported to the credit bureaus.

    and

    About 15% are far less conservative in their use of credit cards and have total card balances in excess of $10,000.

    These are some interesting statistics.  Where do you fall?  If you are looking to improve your credit score, Utilization is a great way.  The issue that many people run into is the fact it is not easy.  If you have over $10,000, it is more than likely not going to paid overnight.  This is a longer term strategy to improve your credit standing.

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User Comments

  1. […] The next 30% of the FICO score calculation is how much you owe.  This is found by dividing your balances by your credit limits.  This is done with each account and you also have a total utilization. […]

    February 24, 2009 Pingback by FICO score calculation, FICO formula, calculating FICO scores | Financially Tough@
  2. […] the opposite.  There are two ways it could actually hurt your credit score.  First, is your credit score utilization which makes up 30% of your credit score.  This is calculated by dividing your account balances by […]

    March 8, 2009 Pingback by Credit Score Myths | Financially Tough@
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