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Does Having a 0% Credit Utilization Hurt My Credit Score? - Credit Card Insider - YouTube
Channel: Credit Card Insider
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Hi. My name is John Ulzheimer, and I'm a
credit expert who contributes to
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Creditcardinsider.com. Today's
question actually came from a comment
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on YouTube from one of Credit Card Insider's other videos. So please feel free to
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submit questions
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in the comments section of these videos.
Today's question is this...
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I've heard that a utilization ratio has to be
1%
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or higher to have any kind of effect, positive or negative, on my credit score.
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Is that true? Is it also true that paying
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my bill in full by the statement date
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therefore leads to a 0% utilization
ratio and
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will that or will that not help my credit score?
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Let's break it down and get a
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some succinct answers to the different
components. First off, utilization ratio,
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let's talk about what that is.
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Credit scoring models consider
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the amount of your credit card credit
limit that is actually being used in the
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form of a balance. And that's commonly referred to as utilization.
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Some people also call it the debt to limit ratio. And what you do is you divide
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the balance on your credit card by
the credit limit on the credit card.
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and that yields a percentage. And that's the
percentage of your credit limit that your currently
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using.
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That percentage is very important not
only in your FICO Score, but in your VantageScore.
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So in all credit scoring systems
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that's an important component. The higher
that percentage
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the lower your scores going to be. And that's
just a fact. You want that percentage to
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be as low as possible.
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So for example on a credit card with a $10,000 limit, if you got a
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$9,000 balance,
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you are 90% utilized on that
card. That is bad news.
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However if you have a $1,000
balance on that $10,000 card
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you're only 10% utilized and that's
considerably better.
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So there's this whole issue of what's better, 0%, 1%, or something else.
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I can tell you that the
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consumers in this country who have
the highest average credit scores, 780 or
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higher
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have an average utilization of 7% percent,
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which means that they've got very low balances relative to their limits and
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they're actually accomplishing this
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one of a variety of ways. They either have a lot of credit cards
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that are unused and therefore you have a
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ton of a credit limits to help keep that
utilization ratio very low
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or they just simply don't use credit cards
that often.
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Or they go online and pay their bills
before it even gets to the statement.
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And therefore what shows up on their credit reports is very very low relative to the limit
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There is a
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reality that actually almost comes across
as a myth sometimes...
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that if you have a 1% utilization
ratio you're actually gonna
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earn more points in your credit score than if you have a
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0% percent ratio. That is actually true.
As comical as that sounds,
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that's actually true. However it's very
very difficult to actually
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nail that 1% because you have
to charge enough on your credit cards
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have that amount show up on your credit report, and that has to equal 1% of
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your aggregate credit limits. It's a very very
difficult thing to accomplish
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I do not suggest it at all. What I
actually suggest that you
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is to go one step further and pay it in
full.
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And not by the due date; pay it in full by the date called the statement closing date.
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The statement closing date is different than the due date.
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The due date is actually 21 days after
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the statement closing date, and it's the date that most
people refer to when they
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think about paying their credit card bills. The statement closing date is actually the
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end up the 30 day period where you
are
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making charges. So there's always this
30 day window when charges are
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recurring. And when that 30 day window ends
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the balances and charges from the
prior 30 days
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are aggregated and that's what goes on your statement. That date is called the statement closing date.
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If you're able to go online and make
payments on your credit card bill,
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so that when the statement closing date hits, the balance is actually
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0. Then 0 is what's going to show up on your credit reports and that's also gonna cause you to
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have a 0% utilization
ratio which is fantastic for
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your credit scores. If you have any other
questions pertaining to credit
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or other financial topics, then please submit them to Creditcardinsider.com
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or in the comments section below. Thanks a lot for watching!
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Have a great day!
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