Understanding Credit Utilization

How much you owe is an important factor in determining your FICO® Scores, making up 30% of the total calculation. One of the elements that FICO considers in this factor is your credit utilization ratio.

Your credit utilization ratio provides insight into how you manage your credit card debt. While it's a good idea to avoid using too much of your available credit, it also doesn't help if you're not using any at all.

If you're trying to figure out how your credit cards impact your FICO® Scores, here's what you should know.
 

What Is the Credit Utilization Ratio and Why Is it Important?

Your credit utilization ratio is the percentage of the available credit that you're using on a given credit card account, as well as across all of your credit cards.
 
For example, let's say you have three credit cards:
 
Card A has a $5,000 credit limit and a $1,000 balance.
Card B has a $10,000 limit and a $4,000 balance.
Card C has a $1,000 limit and a $750 balance.

To get your utilization ratio for each card, divide the balance by the credit limit, and you'll get 20% for Card A, 40% for Card B and 75% for Card C.
 
To get your aggregate credit utilization ratio, you'll add up the three balances and credit limits, then run the same equation. This would give you a total utilization ratio of roughly 36%.
 
Your credit utilization ratio is important because it provides creditors with an insight into how you manage your finances. Credit cards are generally used for everyday spending, and if you regularly max out your credit cards or get close to it, it could indicate that you're having a hard time managing your money without the use of debt.
 
This could spell trouble if you take on a new credit account and don't have the funds to keep up with all of your financial obligations.
 
As such, the more of your available credit that you're using at a given time, the more at risk you are of defaulting on a payment, which results in a lower FICO® Score.
 

What Should My Target Credit Utilization Ratio Be?

Some financial experts recommend keeping your credit utilization ratio below 30%. However, the data doesn't support the implication that your credit score will dip once your utilization ratio crosses the 30% threshold.
 
Just like every other factor in your FICO® Score, the impact your credit utilization ratio will have on your score will vary based on a number of factors.
 
That said, generally the lower your ratio is, the better. Generally, keeping it below 10% (and consistently paying bills on time) can help you build and maintain a good FICO® Score.
 
That said, you want to be careful about having a utilization ratio of 0%. This is because it signifies that you're not using your credit cards at all, giving FICO less information about how you manage your money. While a 0% utilization ratio won't cause your FICO® Scores to drop significantly, it can prevent you from achieving maximum points for the amounts owed score ingredient.
 

How to Lower Your Credit Utilization Ratio

Your credit utilization ratio is determined by two things: your reported credit card balances and your available credit. Keeping the former low and the latter high is key to maintaining a low ratio. Here are some quick tips to accomplish that goal:
 
Avoid spending too much: Avoid using your credit cards too often, especially if you have trouble overspending or if you have cards with low credit limits. Even a balance of $200 on a card with a $300 limit (e.g. 66% utilization) could negatively impact your FICO® Scores.
 
Hold onto old credit cards: Closing a credit card takes away its available credit, which could increase your overall credit utilization ratio. As a result, it's best to avoid closing credit cards unless you're at risk of overspending and getting into credit card debt or there's an annual fee or security deposit, and you no longer use the card.
 
Make your payments strategically: Credit card companies typically report card balances to the credit reporting agencies based on your balance each month when your statement closes. Making a payment before that date could drop your utilization ratio enough to keep it at a satisfactory level. Alternatively, you could make multiple payments throughout the month to keep it low at all times.
 
Make paying off credit card debt a priority: If your credit utilization ratio is chronically high because you have a lot of credit card debt, make plans to pay down your balances as quickly as possible. Pay down your balances can not only benefit your FICO® Scores by lowering your utilization ratio, but it can also have a positive impact on your budget and overall financial health.
 

The Bottom Line

Your credit utilization ratio is an important factor in your FICO® Scores, so it's crucial that you know where you stand and take steps to maintain a low ratio every month.
 
Depending on your situation, this can take time, but the good news is that, as soon as you lower your ratio, your FICO® Scores will respond accordingly— you won't see lingering negative effects as you would with late payments and other negative items.
 
If you're not sure what your utilization ratio is, sign up for a credit monitoring service and keep track of where you stand. If you want to reduce your ratio, start taking steps now to reduce your credit card debt and maintain a low level going forward

Planning for a Credit Worthy Future

 

Credit seems like a complicated fickle thing when you don’t understand it. There are many unforeseen and preventable things that can come about and bite you in the rear leaving you in a credit mess when you are not aware of the ground rules to good credit. 

The best way to avoid those messes or recover after coming out of a financial mess is to plan your financial future and set some boundaries for yourself for a better, more solid financial future.

Planning for your future can look like a lot of things and should involve many different aspects, like living within your means, things you want to accomplish financially, what you want out of your future credit, how you will build and maintain your credit and how you will set guidelines for yourself to avoid making common credit and financial mistakes. This blog post will briefly touch on each one of these to offer readers, regardless of age and current situation some insight into how to plan ahead for a credit-worthy future.

Living Within Your Means

What does this mean exactly, well it means not spending more than what you make each month. This is one of the hardest things for most American families to do, especially when your household expenses exceed your income. 

Ideally, you need to be able to pay all your bills on time each month and still be able to buy amenities like food and clothing, while also putting aside 20% to 30% of your income for savings. To live within your means can be making choices between eating out or learning to cook and eat home cooked meals most of the time, including taking lunch to work from home. 

There are lots of ways to creatively shrink your monthly expenses and live within your means.

What Do You Want to Accomplish Financially?

This is a big part of living within your means, because if you are just distraught over the situation and want to have more luxuries in life, then you simply need to earn more money. You should look at the life you would like to live and then estimate what it would take monthly to make that life happen.

Put together a plan to meet those needs before you start living that way. That could be as simple as seeking out additional training in your industry, working towards a job promotion or asking for a raise, changing jobs or taking a second job. The important thing is to always stay within your current means, even if you are looking for a way to increase your income. 

Until you are making that higher income, it is not available to you.

What Do You Want Out of Your Future Credit?

Most will answer buy a house, buy a car, vacations, college for the kids and retirement. These are all valid reasons and should be part of your goals depending on your family and personal situation, but all these things and many like them require decent to good credit and some careful planning to obtain in a secure, responsible way.

Think about the types of things you want in these areas and speak with professionals in those industries to get a clear picture of what it would look like on paper. This will give you a realistic look at what it takes to get both your credit and savings healthy enough to help you afford and finance the things you want. 

Build and Maintain Your Credit

To build and maintain a good credit score you need to stick with the guidelines surrounding the living within your means section and that also includes paying your bills on time consistently month after month, year after year.

This is not always possible but it's what everyone should strive towards. If you have setbacks beyond your control in this area you should work towards getting back on track as quickly as possible building and maintaining good credit because bad credit also increases the interest rates you pay for credit and insurance!

Set Guidelines for Yourself

It’s important to set some spending rules and good habits for yourself. Don’t completely deprive yourself because that will only lead to failure and can have catastrophic results for your finances and future. Instead, set some ground rules with occasional indulgences and stick money aside in savings for the big rewards.

•  Smart money practices will always win out over excess in the long run.

MyCreditSystem is not just a DIY credit repair system for those already in trouble it is a Credit Education Program that helps you repair your credit yourself and also empowers you with the knowledge to keep a good credit score and maintain your credit rating. 

It's a great gift for High School Seniors and College Students so that they learn early one how to avoid the pitfalls of credit recklessness and also how to get out of it if they need to. They can also build a business around it! Who knows maybe your teenager or young adult is the one that fixes everyone's credit in the family or your neighborhood?

To learn how you, your teenager or young adult can build their own business helping their friends and family fix their credit sit with them and watch this video  
 

9 Steps to Removing Credit Report Errors

Checking your credit reports on an annual basis is a must in this day and age of rampant credit fraud and identity theft, specially since there is a fairly good chance that your credit reports will have one or more mistakes more than once in your lifetime. Think about that!

• A study done by the Federal Trade Commission found that 25% of all consumers have an error on their credit report that negatively impacts their credit score. 

The study also showed that 80% of people who challenge items on their credit report are able to get at least some of the negative information altered or removed. That’s great news! 

Follow this process to get these errors corrected: 

1.    Get copies of your credit report from the three major bureaus. You can get a free copy of each report each year from AnnualCreditReport.com. If you’ve recently been rejected for credit, you’re also entitled to a free copy of the report containing the derogatory information from the creditor that denied you credit.

2.     Get your official credit scores. It would be a shame to do all this work and not know how much of an effect your efforts had on the metric that matters the most. I personally have a subscription to MyFico.com simply because the ability to access both my credit reports and FICO Score all in one place and have live credit monitoring is of great value to me.  

3.     Find and highlight all the errors that are harming your credit score. Some people challenge all the negative information, whether it’s accurate or not with great results but beware of doing so online. You give up a lot of right and protections under the FCRA when you don't dispute errors in writing via certified mail, return receipt requested to document your records but more on that later.

4.  Write a dispute. Your dispute can be very simple. Provide enough information that the credit bureau can identify you and the item you’re disputing. In general, it’s most effective to declare that you were never late or that the account isn’t yours. MyCreditSystem gives you access to all the dispute letter templates you need once you become a member. 

5.  Mail your disputes via Certified Mail Return Receipt Requested. The credit bureaus are on the clock from the time they receive your credit dispute in writing. 

• If they can’t complete their investigation within 30 days, they basically have to make the changes you requested. Include only one dispute per letter. 

• The credit bureaus would love for you to file your dispute online. It saves them time and  money because it automates the process. What's more it usually doesn't resolve your issue favorably. Receiving your letter is much more cumbersome for them. So send your complaints via the postal service.

6.   WATCH THE CALENDAR 

• Their response must be postmarked within 30 days of receiving your letters.

7.   Evaluate the responses you receive back. It’s very likely that some of your disputes will be resolved in your favor. It’s also likely that some will not. 

• One credit bureau has been known to simply give you what you want without investigating at all!

8.  Continue disputing all the negative items. At the end of the day, the credit bureaus exist to make money. They make money by selling credit reports, not by dealing with consumers. Your disputes cost them money. With a little diligence, you’re likely to get your way, so be persistent. 

• Consumers have historically done well when suing the credit bureaus. It’s difficult for them to truly verify the information in your credit reports. If you’re not satisfied with the results, consider filing a claim in small claims court. Credit bureaus get fined $1,000 per infraction. You’ll likely settle out of court and get your credit report cleaned up.

9.  Stay organized. Maintain records of all your correspondence. Make copies and keep those copies filed in an organized manner. Be sure to keep track of dates. 

Fixing the errors on your credit reports is simple, but it does take time. It’s important to check your reports every year and whenever possible subscribe to a credit monitoring program. 

The cost of credit reporting errors can be staggering, as they can dramatically increase your interest rates on any loans you receive, credit cards and insurance rates. 

A BAD CREDIT REPORT CAN PREVENT YOU FROM GETTING HIRED OR EVEN RENTING AN APARTMENT.

Request your credit reports today and spend the time to examine them carefully. Consider making it a part of your annual financial housekeeping and if you want to make sure your credit is repaired correctly become a MyCreditSystem member and doing it yourself. 

You can do it and it will change your life. 

The Easiest Way to Remove Bad Items from Your Credit Report

Did you know that it's possible to remove bad items from your credit report? Any inaccurate item showing up on your credit report that's damaging your credit can be removed, otherwise you have the right to sue the credit agency. 

Here's how to remove bad items from your credit report. 

1. Get a Report from All Three Agencies 

The first step is to get a credit report from all three credit reporting agencies. You can get your report once a year for free from annualcreditreport.com

Look through each and every one of your accounts carefully. Is there anything you don't recognize? Anything that's overstated or understated? 

Highlight any suspicious accounts. Note the account numbers and descriptions. 

Some bad items will appear on just one agency's report, while other errors will appear on all your credit reports. 

2, Beginning the Dispute Process 

Look for the dispute address of the credit agency you want to contact. It's usually on their website. Also look at their expected response times and policies for removing items. 

The FCRA states that they must respond within 30 days. If you don't get a response within 30 days, you may be eligible for a lawsuit and the item has to be removed from your credit file. 

Your dispute letter must illustrate exactly why you believe the account is erroneous and it also needs to list the exact account number(s) as it/they appear(s) on the credit report including the account description listed on the report.

MyCreditSystem gives you full access to a DYI Credit Repair / Credit Literacy Program including precise credit dispute letters and instructions for each case scenario to dispute credit report errors and/or remove collections, charge offs, medical collections, bankruptcy, repos, foreclosure, evictions and even student loans,

Be sure to be very clear about what you want them to do. For example, if the account exists but isn't actually delinquent, let them know that you want them to update the status to "Never Delinquent" rather than to remove the item because your credit history can be adversely affected by removing long standing accounts you have paid but have been late on.

3. The Next Steps  

One of three things will happen once you've sent in your dispute letter: 

• They respond and remove the item. In this case, no further action needs to be taken. 

• They respond and say that the item is not an error. They need to also provide documentation stating why this is the case, including the actual credit filing by the creditor.  

Look over the filing. Was this account opened by you? If not, you may have an identity theft and credit fraud issue on your hands. If it was, but is being incorrectly reported, you need to contact the creditor directly to work out the issue. 

• If they don't respond. In this case, you have certain rights, including at times the right to have the items removed or the right to a lawsuit. Consult a lawyer for specific rights in this case or use MyCreditSystem to save thousands of dollars and repair your own credit legally.

The whole process of disputing a report item should take no more than three hours each. Those three hours could result in your ability to open credit cards, your ability to buy a home or your ability to buy a car at much better rates. The choice is yours. Can you rely on someone else to do this for you immediately or are you going to take control of your credit repair timeline.