The video is about Myths about Utilization Ratios. We may hear of other people saying you should keep your utilization as low as possible at no more than 30%. I don’t know where people got 30% from, but what I recommend is either keep at 0% or100%.
I mean when I was saying you should always keep your utilization below 30%, just like when I said you should always drive that 55 miles an hour on the freeway sometimes. You may feel like going 55 miles an hour, and some other times you should go a little faster, but you definitely shouldn’t be driving 55 when it’s snowing.
Where should you keep your utilization ratio? Should we keep at 0 percent, 30 percent, 100 percent or 65.8 percent? The answer is it depends, the higher your utilization ratio, the lower your score would be. It is positive that if you keep your utilization always at 30 percent or lower, your credit card issuer is going to warn you that you don’t really need that much credit, so your total credit limit is not going to rise so fast.
To recommend for people that have regular spending, what is actually higher than their limit is actually to use the credit card all the way up to 100 percent. Your credit score depends on some totally different factors. Each one is weighted differently, your utilization ratio is worse.
Thirty percent of it is your credit score, while thirty-five percent of it is your payment history. If you’re on time or not fifteen percent, use your credit age, which is the average age of all your credit lines. Ten percent is the types of credit you have, so if you have a mortgage car loans, that’s paid off student loans, personal loans and self lending loans.
The more of those you have, the higher percentage you’re going to get. Another 10% is new credit, so if you have too many new credits, you’re going to start to shrink this 10% down to zero. However, if you don’t have any new credit for several years, you’re going to get to the full points
A typical FICO score is out of 850 points. Your utilization ratio is thirty percent of your score, which means you can get two hundred fifty five points at most if you have perfect utilization ratio now, which means zero utilization ratio. As I made up this formula, we should roughly track your utilization ratio and the contribution of points to your total credit score. Your realization ratio points are really 255 times 1 minus, the credit use divided by total credit limit.
Whatever you owe on your credit cards is reported to the credit bureau right on the statement date, the total credit limit is the total limit across all your credit cards. If you have more than one, you can refer to this you’re your utilization ratio is 0 divided by 1000 1 minus, namely 1 times 255, you’re going to get the full points of 255.
However, let’s say you maxed out your credit cards and you spent $1,000 out of the total $1,000 limit that you have. Your utilization ratio is going to be 255 times 1 minus 1,000 divided by 1,000, which is 1 as shown here. This is 0 and so this whole thing is 0. You’re going to get 0 points out of 255. Then you’re going to get a really low score because 850 minus 255 is roughly 595, which is really low.
People have been mentioning 30% or less utilization ratio, you’re going to see what happens. 30% out of $1,000 limit is actually$300, spending 1 minus 0.3 is 0.7, so you’re going to end up getting only 178 and a half points out of the 255 that you could have got. If you use your credit all the way up to 100% of your limit, it will temporarily reduce your credit score slightly.
However, the point here is to force your credit card issuer to give you a higher credit by demonstrating that you can pay it all off. After spending it all the way up to 100, you pay it all off and you do that for 3 months. Then before you know it, your credit card is saying you’re using a lot of credit and they’re paying it off, so you’re generating a lot of revenue for us. Then they’re going to increase your limit, for instance, they might double it or triple it.
If you don’t need your credit score temporarily, this is a really great way to increase your total limit very fast, you can even run your credit card all the way up to 100% and then pay it all off right before your statement date. Therefore, you can get the best of both worlds where you can force a total limit to increase several months down the line and you zero out your utilization ratio.
It can be seen that your credit score will not be impacted when you’re doing this maxing out for several months. Now that you might get to a point where your total spending is, I’m going to reach your total credit limit in that case. Provided that you spend only 80% or 90%, but if you keep on doing that, they’re going to get double your total credit limit again, based on the fact that they see that you’re spending way too close to your limit, which is not to their interest.
They want to give you more credits so that you have more room to spend. Then it might drop down to 50% and you have twice as much credit limits as you need. If you just keep on spending month-to-month and paying at all for every month, they’re going to increase your total limit more quickly, because it’s going to double it and then double it some more. Once it reaches to a point where your total credit limit is, for instance, 10 times of your regular spending, you don’t really care about your utilization ratio nor have to do the boost trick anymore, because the total utilization ratio even on your total spending amount is only 10%. Assuming that you spend a thousand dollars normally and your total credit limit reaches to 10,000, even if you spend $1,000 a month on a $10,000credit limit, they are going to double it eventually.
It’s going to rise extremely quickly, and then it’s going to be 5 percent utilization ratio. Where this is going? You’re just going to increase your limit so that even your regular spending is going to be a tiny portion of your utilization ratio. When it gets to this point, you don’t have to do any boosting trick and yet you can still get the full point from 30% of your credit score as well as the maximum points in that category already.
A lot of people have asked me to about the utilization ratio, where you have to use a hundred percent. It’s really counterintuitive, so I hope this video explains it all. If you’re interested in or supportive to this channel, don’t forget to check out my audible like in the video description below, where you can get a free audio book. If you cancel before the trial period ends, you won’t have to pay anything to keep the audio book for free as well. Please don’t forget to check out my patreon link and subscribe. Thanks for reading.