Utilization: What it is and why it Matters

At the end of 2005, I had FICO scores that were somewhere in the 650-675 range. Mind you, I had no blemishes on my credit report. No lates, no collections, no nothing. So what was keeping my scores down? Utilization.

My utilization was out of hand. (For those who don't know, utilization is the amount of credit that you are currently using. If your credit limit is $5,000, and you're using $4,000 of that limit, then you're using 80% of your available credit. Thus, your utilization is 80%.) I knew that being nearly maxed out on some of my cards could be hurting my scores a bit, but I never realized that utilization was punishing me to such a large degree. Indeed, it wasn't unheard of for me to be 65% utilized across the board. After all, I figured that I could afford the debt service, so what was the problem? Turns out it was a big problem -- at least to creditors who peered at my credit report on a monthly basis.

My wake-up call arrived in early 2006 when Chase rate jacked me to the tune of 29.99%. This account was opened in 2000. I had never been late, never gone over the limit, and always paid more than the minimum. My reward? Rate jack! Thanks a lot, Chase. I immediately transferred the balance to a 0% card.

Curious, I decided to see if others had experienced the same kind of treatment from other creditors. I eventually Googled my way to a credit message board -- creditboards -- where people discuss all kinds of credit issues.

It was there that I discovered the deleterious effect that utilization was having on my scores. It also explained why Chase -- even though I had been a model customer (a very profitable customer, mind you) -- decided to up my interest to a loanshark-like 29.99%. Since then, I have been on a mission. I've added new credit cards to my stable -- and I've added many $100s of thousands in available credit.

What's more, my utilization has gone from the 64-65% range to 0%. As of today, I'm what the credit-card industry calls a "deadbeat." I don't carry balances. I pay all of my cards in full each month. I pay no interest. I utilize my cards for rewards and interest-free loans. That's it. These credit-card companies are giving me interest-free loans for up to 55 days (30 days during the statement period and 25 days during the grace period). I have finally turned the tables on the card companies. Card companies, it turns out, think that I am now a better risk, which is why I don't get turned down for new credit and now receive the best rates and generous limits.

My change in credit habits has allowed me to be free. I'll never be at the mercy of card companies that have you between a rock and a hard place. Remember, these card companies know your credit reports intimately (they conduct account reviews monthly). They know when you have access to other credit sources. Or don't.

Carrying balances from month to month puts you at the mercy of credit card companies. These credit card companies don't like you. They are not your friend. They don't care about you (miss a payment or go over your limit and you'll see). And they are not looking out for you. The only thing they care about is making a dollar off you. That's it. That's their business. Their goal is to exact as much coin from you as they possibly can.

Low utilization (I consider anything under 10% as low) also helps your credit scores. Utilization accounts for 30% of your credit score. My over-utilization was costing me about 100 points on my FICO score (FICO scores range from 300-850). FICO looks at utilization two ways. It looks at your overall utilization (all of your cards combined) and it looks at each card individually. Therefore, it's possible to get dinged for having one card maxed out while your overall utilization (on all of your cards) is relatively low. That's why you want to keep utilization down on individual cards, too.

Today, all of my scores are above 750. I haven't been under 700 since some time in early 2006. And I don't plan on returning anytime soon.