In my perfect world, there would be no credit scores. And while I don’t believe credit is necessarily bad, in this perfect world of mine, there wouldn’t be any need for all that because it would be, well…perfect!
Back to reality. There are myriad reasons why we need to have a good credit history and excellent credit scores.
Whether we like it or not, many things now depend on one’s credit rating. Take, for example, car insurance premiums. Want the best rates? You will need a good credit rating.
Do you want to make sure that among all the applicants, you get that very nice apartment? You should assume that your potential landlord will look at your credit history to determine if you will make a reliable, on-time paying tenant.
Are you vying for a job with a great employer? Better hope your credit report is clean and represents you well because in most states employers are allowed to review how you manage your finances.
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We live in a world where, in certain situations, the credit report is considered a character reference. Look in my credit report and you’ll have a good idea of how I manage my life. You will see evidence of the seriousness with which I take my commitments, a little of my personal integrity.
The most popular, and the one used by most lenders and others who review credit scores, is the FICO score. Each of the major credit bureaus has its branded version of FICO. How these scores are determined, based on information collected from one’s credit report, remains the property of Fair Isaac Corporation, creators of the FICO score.
We do know, however, that FICO looks at what it calls “usage rate.”
Your utilization rate is your credit limit relative to the amount of available credit you are using at any given time, expressed as a percentage.
So if you have a credit card with a credit limit of $1,000 and a balance owing of $100, then you are “used” 10% on that card. You calculate the utilization rate by dividing the balance owing on the account by the card limit, then multiplying that figure by 100. ($100 / $1,000 0.01 x 100 10)
You can calculate your “overall utilization rate” by adding all of your credit card balances together, dividing by the total credit limits on all of those accounts, and multiplying by 100. Credit scoring looks at both credit card rates. ‘use.
The best utilization percentage is 0% because then you have no credit card debt and you pay no interest. But, since that’s not realistic for everyone, the best percentage is the lowest percentage you can achieve. In fact, according to FICO, consumers with exceptional credit scores above 800 have an average utilization percentage of 4%.
There are reports all over the internet that insist that 30% or 50% are the “target” percentages in order to get great scores. These are false reports. In fact, nothing great happens at 30% or 50%. Yes, 30% is better than 50% but not as good as 20%.
Think of usage rates as you would in golf: the lower the score, the better. Generally, to get the best credit score, your utilization rate should be below 30%, with the goal of bringing it down as much as possible.
Pay off your credit cards as much as you can. There’s nothing good about having a lot of credit card debt. It’s expensive debt and it wreaks havoc on your FICO score. If you manage to get a utilization rate below 10%, your score will thank you!
Question: On a scale of 1 to 10 where 1 “doesn’t care” and 10 “totally obsessed and check it regularly,” how does your relationship relate to your FICO score?
Mary Hunt, founder of www.EverydayCheapskate.com, writes this column for Creators Syndicate. Submit comments, advice or questions on its website. She will respond to topics of general interest through this column, but letters cannot be answered individually.