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- Credit utilization is the No. 2 factor in calculating a credit score.
- Overall utilization is important, as well as the ratio on each account.
- Keep your utilization below 30% to keep your score high.
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I expect a bonus check. Which of my credit card accounts should I pay first to increase my credit score?
Bill, I am getting a bonus check next week and can pay a few bills off or a loan, but just not sure which one (that would affect my credit score the best). The check would be in the range around $2500-$2600. Credit Card-Home Depot: Bal: $675.00 CL: $800.00 Credit Card-HFC: Bal: $650.00 CL: $750.00 Credit Card-Goodyear: Bal: $663.00 CL: $1600.00 Credit Card-M/C: Bal: $685.00 CL: $750.00 or a loan bal of $2500.00, monthly bill is $300.00, not paying any interest on balance, everything is going to principle. Thanks in advance for you response. Dave
Payment history is the No. 1 component in a credit score and accounts for 35% of a score. Credit utilization is the No. 2 variable and makes up 30% of a credit score. My answer assumes you have paid all of your accounts reliably and on time. In other words, my answer ignores your payment history, and instead focuses on your credit utilization.
Many experts believe a 20-30% credit utilization is best, but there is controversy on this subject. Even Fair Isaac & Co., the creator of the FICO credit score, is inconsistent in its public statements regarding at what point credit utilization passes from positive to bad to severe score damage. Experience tells me that at 100% a credit score suffers seriously. If you pay down your amounts owed to bring your credit utilization factor down to 50% it will probably raise your credit score 50+ points. If you are in a position to pay down all your amounts owed to zero your credit score will rise 100 points or more!
Two factors are taken into consideration when calculating credit utilization. The first is overall utilization. This is calculated by adding together the balances of all of the revolving accounts, then adding together all of the credit limits, and finally dividing the balance by the limit.
Let us look at a simple overall utilization example using sample data:
| Tradeline | Balance | Limit | Utilization |
|---|---|---|---|
| Credit Card No. 1 | $300 | $500 | 60% |
| Credit Card No. 2 | $100 | $300 | 30% |
| Credit Card No. 3 | $500 | $1,000 | 50% |
| Total Utilization | $900 | $1,800 | 50% |
In the credit score business, a credit account such as a charge card or auto loan is called a tradeline. A person with the above three tradelines and balances has a 50% credit utilization, which is neither in the good territory nor the bad. The credit scoring models do not stop just at overall credit utilization.
Individual credit account utilization is also taken into account when calculating credit utilization. If you have any individual account where the balance is over 30% of the credit limit, it is likely hurting your credit score. Therefore, even if overall credit utilization is under 30%, if any one of those accounts have a balance over 30%, your credit score is dinged.
Now let us look at the information you provided.
| Tradeline | Balance | Limit | Utilization |
|---|---|---|---|
| Home Depot | $675 | $800 | 84% |
| HFC | $650 | $750 | 86% |
| Goodyear | $663 | $1600 | 41% |
| Mastercard | $685 | $750 | 91% |
| Total Utilization | $2,673 | $3,900 | 69% |
Your overall credit utilization is high but but not a disaster. Your Mastercard account utilization is in the disaster range, and should be paid first if credit score is your biggest concern. The Home Depot and HFC tradelines should be knocked down next, followed by your Goodyear card.
Conclusion
If you pay all of your tradelines 100% of the time, keeping your credit utilization down is the top variable in your credit score. It is also the hardest thing to keep in check for many. For more information on credit scores please visit our credit resources page.
I hope the information provided helps you Find. Learn. Save.
Best,
Bill
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