D’Arruda. who said his typically stands at about 10% to 15% and no more than 25%. began this credit-building experiment based on the simple notion that your credit score is mostly determined by the amount of available credit subtracted by the amount outstanding.
It’s a fussier method than that. but your utilization rate is worth some 30% of your score. Creditors don’t want to see the ratio over 30% and consider it an important link to your financial acumen and any lifestyle changes you may be facing.
“You don’t need a lot of credit cards
To have a good utilization rate.” said Barry Paperno. consumer operations manager for myfico.com. the consumer arm of credit-scorer FICO. “And obtaining 25 credit cards for your score is overkill. Utilization looks at percentages more than dollars.”
Consider it this way: If you have $300.000 in available credit and carried a $30.000 balance. your utilization rate is 10%; if the available credit stands at $3.000 and you charged $300. your utilization rate is the same.
What you must have are credit limits
Meet your charging needs. said Steven Katz. senior director of operations for TransUnion. the credit- and information-management company. “You may need a smaller number of cards with higher limits or more cards with smaller limits to stay under that 30% utilization rate.”
Don’t max out one card over another either in order to keep the utilization rates under 30%. he added. If you take out a store credit card with a $5.000 limit and you charge $4.750 for a home-theater system. your utilization rate on that card will set off alarms.
“It’s a good idea to try to keep the balance
On each card under 30% of the limit.” Katz said. “It will help guide your efforts to keep your overall credit use low.”
A perfect score is near impossible to get email data and having credit but not using it won’t get you there. That’s doesn’t mean that you have to carry a balance that you must then pay interest fees on each month. You just need to use the card and pay it off to maximize your credit score.
“The ideal place to be is under a 10% utilization rate but over 0%.” FICO’s Paperno said. “There needs to be some kind of recent activity” to activate a score.
Your credit mix and history contribute
about 15% to your score. Creditors like to see how you handle revolving credit. or credit cards. and installment loans. like mortgages and car and student loans. They average the age of the accounts divided by the number of accounts. Surprisingly. income doesn’t play a very significant part of the credit score.
D’Arruda had a long credit history before he started on this venture and said he was cautious about how much credit he applied for when. That’s because your score gets dinged each time it’s checked for new credit. Applying for too much credit at once has creditors worried that you’re in a financial bind and getting ready to rely on credit you might not pay back.
New accounts opened also impact your score
By about 10% for much of the same reason. “Taking about currency exchange on new credit has shown to indicate a higher level of risk.” Paperno said. “People who go into default tend to have added new credit more recent than those who haven’t.”
D’Arruda admits he started collecting credit cards as a personal challenge to see how many he could get before he got cut off. The limits on each card vary. of course. and he’s even got an American Express that has no limit. though he’s not willing to test what that might mean.
“This is a lesson in discipline
When you get the credit card. it’s like free china leads money. You have to manage them well. It all comes down to not overspending because it’s not your money.”
And he said he only chooses cards that will help him with points. miles. cash back and other perks. He likes the 30% discounts he gets at Kohl’s. for example. and the special sales offered only to Home Depot and Best Buy cardholders. He’s a big fan of the Capital One card because it offers double miles.