Help understanding Credit Utilization (new to credit cards)

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Cranberry44
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Help understanding Credit Utilization (new to credit cards)

Post by Cranberry44 » Mon May 25, 2020 12:07 pm

I’ve never used a credit card until this month, and I’m struggling to wrap my head about credit utilization.

The general rule seems to be that you should only be charging 30% or less of your credit limit.

QUESTION: is credit utilization is calculated daily or monthly, and is it wiped back to zero each time you pay off the card, or does it accumulate over the course of the month?

EXAMPLE: Say I have a card with a credit limit of $1,000. On the first of the month I pay for a $300 item, and pay it off later that week. Is my credit utilization 30% for the rest of the month? Or just during the time that it remains unpaid (i.e. Can I use the credit card again that month, after paying off the item, without going over the 30% credit utilization rule)?

A second question: does it make sense to pay off CC charges as soon as the appear in my bank statement, or should I wait until the payments are due?

I also welcome any additional resources on responsible use of credit cards (again, I’m totally new to this). I currently have a 1% cash back rewards card through Wells Fargo, but will be applying for the CITI 2% cash back card in the near future.

Thank you!

Silence Dogood
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Re: Help understanding Credit Utilization (new to credit cards)

Post by Silence Dogood » Mon May 25, 2020 12:36 pm

OP,

Your credit card balance is reported once each month to whichever credit bureau (TransUnion, Equifax, Experian) your credit card company chooses to report to. Therefore, it is a "snapshot" based on whichever day your credit card company reports it.
Last edited by Silence Dogood on Mon May 25, 2020 12:38 pm, edited 1 time in total.

mhalley
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Re: Help understanding Credit Utilization (new to credit cards)

Post by mhalley » Mon May 25, 2020 12:37 pm

Credit utilization is calculated when they send you the bill. So if you have a $1000 limit and charge $300, then your utilization is 30%. Now, if you pay the 300 after you get the bill , it does not reduce your utilization, it is still 30%. You can get around this by making a payment that clears prior to the date your bill is calculated. So if you Charge $300, then pay $200 before they calculate your bill, when the bill comes and it is for $100, your ratio is 10%.
https://www.creditkarma.com/credit-card ... dit-score/

Silence Dogood
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Re: Help understanding Credit Utilization (new to credit cards)

Post by Silence Dogood » Mon May 25, 2020 12:39 pm

mhalley wrote:
Mon May 25, 2020 12:37 pm
Credit utilization is calculated when they send you the bill.
Not necessarily, I have a credit card that reports on the last calendar day of each month (which is not the same as the statement date).

mhalley
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Re: Help understanding Credit Utilization (new to credit cards)

Post by mhalley » Mon May 25, 2020 12:45 pm

Good point, the date can be different for different cards, and some can report more than once a month, check with your cc co for their reporting dates if utilization could be a problem.
I’ll describe the credit reporting process that originates with your Wells Fargo card statement and results in your credit bureau scores:

1. On or shortly after the date your monthly billing cycle is completed — the statement date — Wells Fargo or its third-party processing company transmits the card balance, credit limit, payment due, seven-year payment history and other account information to each of the three major credit bureaus: Equifax, Experian and TransUnion. Or, rather than report this information as of the statement date each month, some banks use a cutoff date unrelated to the statement date to send the data about your account as of that point in time. Additionally, they may use different cutoff dates for each of the credit bureaus.
https://www.creditcards.com/credit-card ... s-1586.php

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Cranberry44
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Re: Help understanding Credit Utilization (new to credit cards)

Post by Cranberry44 » Mon May 25, 2020 2:20 pm

Silence Dogood wrote:
Mon May 25, 2020 12:39 pm
mhalley wrote:
Mon May 25, 2020 12:37 pm
Credit utilization is calculated when they send you the bill.
Not necessarily, I have a credit card that reports on the last calendar day of each month (which is not the same as the statement date).
Thanks, all!

So, is there any reason not to pay off any charges the moment they show on my balance? i.e. to help build my credit score, do I need/want it to be reported that I have a credit utilization between 1% and 30% -- or is 0% fine too?

Silence Dogood
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Re: Help understanding Credit Utilization (new to credit cards)

Post by Silence Dogood » Mon May 25, 2020 2:32 pm

Cranberry44 wrote:
Mon May 25, 2020 2:20 pm
Silence Dogood wrote:
Mon May 25, 2020 12:39 pm
mhalley wrote:
Mon May 25, 2020 12:37 pm
Credit utilization is calculated when they send you the bill.
Not necessarily, I have a credit card that reports on the last calendar day of each month (which is not the same as the statement date).
Thanks, all!

So, is there any reason not to pay off any charges the moment they show on my balance? i.e. to help build my credit score, do I need/want it to be reported that I have a credit utilization between 1% and 30% -- or is 0% fine too?
If you are able to determine the date that your credit card company reports to the credit bureau, you will want to have some balance reported for that date. I believe 1-20% would actually be best.

Of course, paying off your credit card balance - in full - by the due date, is always best practice.

Note: Maintaining a low credit-utilization-ratio becomes easier if you are able to increase your credit limit while not increasing your spending level.

mhalley
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Re: Help understanding Credit Utilization (new to credit cards)

Post by mhalley » Mon May 25, 2020 3:33 pm

I think your end goal should be to get your cc limits high enough so you don’t have to worry about whether putting something on the cc is going to screw up your utilization and thus decrease your credit score. Of course this is much more important if you are planning taking out a mortgage or car loan in the near future. If there are no immediate plans, the occasional month of exceeding the ideal utilization won’t matter that much.

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Re: Help understanding Credit Utilization (new to credit cards)

Post by grabiner » Mon May 25, 2020 9:27 pm

Silence Dogood wrote:
Mon May 25, 2020 12:39 pm
mhalley wrote:
Mon May 25, 2020 12:37 pm
Credit utilization is calculated when they send you the bill.
Not necessarily, I have a credit card that reports on the last calendar day of each month (which is not the same as the statement date).
However, the balance reported to the credit bureau is usually the statement balance; this is what I have seen on all of my cards. This is more useful to potential creditors because it makes scoring more consistent; your credit score on May 31 should depend on how much you charged in May and whether you pay on time, not on whether the payment due June 15 which you mailed posted on May 31 or June 1.
Wiki David Grabiner

mervinj7
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Re: Help understanding Credit Utilization (new to credit cards)

Post by mervinj7 » Mon May 25, 2020 9:35 pm

Cranberry44 wrote:
Mon May 25, 2020 2:20 pm
Silence Dogood wrote:
Mon May 25, 2020 12:39 pm
mhalley wrote:
Mon May 25, 2020 12:37 pm
Credit utilization is calculated when they send you the bill.
Not necessarily, I have a credit card that reports on the last calendar day of each month (which is not the same as the statement date).
Thanks, all!

So, is there any reason not to pay off any charges the moment they show on my balance? i.e. to help build my credit score, do I need/want it to be reported that I have a credit utilization between 1% and 30% -- or is 0% fine too?
In my experience, it only skews your score just a few points. That said, before I do a refinance I generally try to "prepay" my CC in order to keep the utilization less than 5% for three previous 3 months. My only goal is to push my score up by 5-7 points for the absolute best rates.

In your case, since your report is so new the most important thing is to pay every bill on time, maintain a relatively low utilization ratio, and build up your average account length. Unless your buying a house, no need to stress.

Student2
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Re: Help understanding Credit Utilization (new to credit cards)

Post by Student2 » Mon May 25, 2020 10:23 pm

I agree with mervinj7. The impact to your credit score from higher utilization is temporary and will return to normal in a few months at most. Unless you need as high a credit score as you can have, there's no reason to worry about it. If you ever do need to maximize your credit score (and it's going to take you at least 6 months or at least a couple of years to do that), then keep your credit utilization on *each* card as well as overall, well below 30%. The 30% threshold is definitely where you cross a line, but keeping your utilization below 15% or so will make the greatest impact to your credit score. Do this if you're applying for a mortgage in a few months or if you're applying for a loan.

Credit scores are a game, but they're a game you'll need to play at key moments. Never forget that they are designed to let the credit agencies know how profitable you are. Having a credit card, or preferably 2 (wait at least 6 months before applying for another one), will help you navigate this 'game'. It's something you will need to rely on, but keep it in perspective. I went from a mid-600s score as a graduate student with little credit history, to high 830s on a FICO credit score as a result of paying off most utilization before reporting to credit agencies happens and keeping my utilization stay well below 30%. If you want to learn more, a great source of information can be found on https://www.myfico.com/

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Cranberry44
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Re: Help understanding Credit Utilization (new to credit cards)

Post by Cranberry44 » Tue May 26, 2020 8:59 am

Thanks all -- this really helps. I appreciate all your helpful and thoughtful responses -- I'm learning a lot!

afan
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Re: Help understanding Credit Utilization (new to credit cards)

Post by afan » Tue May 26, 2020 1:50 pm

One of the crazy things about credit utilization is that they really mean it about % utilization. When I increased my credit limit on our main card without increasing spending, my score went up. I don't know whether there is any negative effect of increasing credit limit but having a high limit combined with low utilization seems to be the best. Thus, providing you don't do it too often or get your total credit outstanding too high, you can increase your score by increasing your limit but keeping the same low utilization.

At one point I did an experiment to see whether paying off a credit card balance early. It did seem to increase the credit score by a few points.

For someone trying to build up their score, I would strongly suggest putting the card on auto pay and paying the entire bill every month. That eliminates the risk of missing a payment. It will be up to you to check the bill in case there is an error, but you will have a perfect record of on time payment.
Same for any other recurring bills- auto pay your mortgage or rent, telephone, cable, whatever.
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Re: Help understanding Credit Utilization (new to credit cards)

Post by Dominic » Tue May 26, 2020 2:01 pm

Cranberry44 wrote:
Mon May 25, 2020 2:20 pm
Silence Dogood wrote:
Mon May 25, 2020 12:39 pm
mhalley wrote:
Mon May 25, 2020 12:37 pm
Credit utilization is calculated when they send you the bill.
Not necessarily, I have a credit card that reports on the last calendar day of each month (which is not the same as the statement date).
Thanks, all!

So, is there any reason not to pay off any charges the moment they show on my balance? i.e. to help build my credit score, do I need/want it to be reported that I have a credit utilization between 1% and 30% -- or is 0% fine too?
You don't usually want to pay the second a transaction posts if you have a rewards or cashback card. Many of the cards post rewards based on the final bill. You absolutely should pay your balance in full before it's due. Missed payments have a serious impact and they last a long time, and making minimum payments is a way to get deeply in debt.

I think you should have at least some balance on your card at the end of the statement so that the company reports an on-time payment. (I'm not sure if it counts if you "pay" $0, but I might be wrong.)

The impact of utilization on your credit score has little to no history. At worst, your score will recover from high utilization within months. If you're not looking for a new loan, I wouldn't worry about it. As you build credit history, your credit card issuer will raise your limit and utilization will become a non-issue as long as you keep your spending levels reasonable. Almost all of my spending is on credit cards, and I rarely hit 10% utilization (usually on months where my car insurance renews).

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Re: Help understanding Credit Utilization (new to credit cards)

Post by FrankTheViking » Tue May 26, 2020 2:05 pm

I came across something somewhere that claims under 10% utilization is optimal. Under 30% is good but 10% is better. I pay cards off weekly to keep utilization down, might as well assuming most of your banking is done online.
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Cranberry44
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Re: Help understanding Credit Utilization (new to credit cards)

Post by Cranberry44 » Fri Jun 05, 2020 12:44 pm

Dominic wrote:
Tue May 26, 2020 2:01 pm
Cranberry44 wrote:
Mon May 25, 2020 2:20 pm
Silence Dogood wrote:
Mon May 25, 2020 12:39 pm
mhalley wrote:
Mon May 25, 2020 12:37 pm
Credit utilization is calculated when they send you the bill.
Not necessarily, I have a credit card that reports on the last calendar day of each month (which is not the same as the statement date).
Thanks, all!

So, is there any reason not to pay off any charges the moment they show on my balance? i.e. to help build my credit score, do I need/want it to be reported that I have a credit utilization between 1% and 30% -- or is 0% fine too?
You don't usually want to pay the second a transaction posts if you have a rewards or cashback card. Many of the cards post rewards based on the final bill. You absolutely should pay your balance in full before it's due. Missed payments have a serious impact and they last a long time, and making minimum payments is a way to get deeply in debt.

I think you should have at least some balance on your card at the end of the statement so that the company reports an on-time payment. (I'm not sure if it counts if you "pay" $0, but I might be wrong.)

The impact of utilization on your credit score has little to no history. At worst, your score will recover from high utilization within months. If you're not looking for a new loan, I wouldn't worry about it. As you build credit history, your credit card issuer will raise your limit and utilization will become a non-issue as long as you keep your spending levels reasonable. Almost all of my spending is on credit cards, and I rarely hit 10% utilization (usually on months where my car insurance renews).
Interesting -- thanks!!

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