My credit usage has exceeded 50%. Here’s what happened to my credit score.

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This is the story of how a badly timed credit card purchase turned into a massive credit rating drop. While it has a (mostly) happy ending, there are a few lessons to be learned.

Not so long ago, a member of my family had to go through surgery for a broken arm. Now we have medical insurance, but that insurance comes with a large deductible, which meant we still had to pay a few thousand dollars in medical bills.

Thanks to our handy emergency fund, we had the money to cover the costs. But who walks into the surgery center with a suitcase full of cash? No, if nothing else, this medical drama would have the silver lining of credit card rewards.

Now the card I chose to use was the one that offered me the best rate. What I didn’t take into account was the fact that this card had a lower limit than others I might have chosen. Why is this important? Turns out that surgery bill was enough to boost my utilization rate by more than 50% – and my credit score didn’t like it one bit.

The basics of using credit

Here you may be wondering what is a credit utilization ratio. Essentially, your credit utilization rate is the percentage of your available credit that you use on a given card (or all of your cards combined).

For example, if your credit card has a limit of $5,000 and you have a balance of $1,000, your credit utilization rate is: $1,000 / $5,000 = 0.2 = 20% .

Why is this important? Your FICO® credit score is based on five different factors, including:

  • Payment history (35%)
  • Amounts due (30%)
  • Length of credit history (15%)
  • Composition of credit (10%)
  • New credit (10%)

This second factor, amounts owed, is where your usage comes into play. Rather than just looking at how much money you owe in general, your credit score takes into account how much available credit you are using, c ie your utilization rate.

Using too much of your available credit is considered a red flag because it could mean you’re spending more than you can repay. Although you have the most problems if your globally usage is high everything of your accounts, even having a single card with a high usage rate can hurt your credit score. (This is one reason why it’s a bad idea to max out a credit card.)

How this impacted my credit rating

In general, it’s considered a good rule of thumb to keep your utilization rate below 30%, with the ideal rate being below 10%. Going over 50%, I triggered this little “Danger, Danger!” robot from, well, every sci-fi movie of all time.

The result? My credit score dropped 25 points.

Although this seems like a big drop, it was actually not as bad as it could have been. I had a few important factors in my favour:

  1. My globally usage was still very low. I have a fair amount of available credit on several credit cards, and this was the only card with a high balance. If I had multiple credit cards with high usage, my score would probably have gone down a lot more.
  2. My credit score was above 800 before the fall. Even losing 25 points, my credit score was still firmly in the “very good” range. If my score had been lower, the drop could have been more impactful.
  3. I didn’t ask for new credit right away. Since I didn’t need to apply for new credit products – or undergo a credit check for anything else – the drop in my score didn’t actually affect anything significant.

If any of these factors had been different, the 25-point drop could have been much more painful.

how i bounced back

Your credit score is a continuous number, which means it changes all the time, sometimes even daily. Part of the reason is when each lender sends your balance information to the credit bureaus. For example, most credit card issuers will send your latest balance information to the credit bureaus once a month, usually at the end of your statement period.

This delay means that even if you pay off your credit card in full before your bill is due, you may have a high balance reported to the credit bureaus. However, you usually have a grace period between your statement closing date and your bill due date to pay your balance without being late or paying interest.

And that’s what happened to me. The medical bill hit my credit card just before the end of the statement period. So that’s the balance that was reported to the credit agencies – and was used to calculate my credit score during that time.

Since we had the money in savings, I was able to pay off that credit card in full well before the due date, avoiding interest charges altogether. And as soon as my credit card issuer sent my updated balance to the credit bureau (which was several weeks later), my credit score completely rebounded.

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