Credit Utilization

You can sign up for the Lemon beta at lemon.co.

What a sexy topic, right? It’s up there with Annual Percentage Rate and 401(k) Rollovers. Despite the impact credit utilization can have on your credit score, aka your life, I’ve noticed very few people understand it.

Lemon lets you know when you’re using too much credit on a given credit card or in total.

There are two main things to understand with regards to credit utilization.

1. Ratio and Impact on Credit Score

Credit bureaus and banks don’t know you personally or how responsible you are, so they guess at your integrity and ability to repay based on your current and historical financial behavior. How much credit you’re using from month to month (your “utilization percentage”) is a major factor in their guess — roughly 1/3 of your score.

Imagine a banker saying, “How close to maxing out your card are you? Oh wow, you’re totally maxed? Do you always do that?” Banks see high usage as a negative sign and they punish you for it — charging you higher interest rates offering less favorable terms.

Let’s walk through a scenario. Here’s your credit card. For easy math, you have a limit of $10,000.

Note: We don’t offer the Lemon card just yet.

Here are three different balances and their corresponding utilization rates:

The math is pretty simple. If you have a balance of $6,000, you’re using 60% of the total available credit. It’s ideal to stay around or under 30%. Banks see usage under 30% as responsible, wise, frugal etc.

In other words, don’t let your balance be over 30% usage on the reporting date.

2. Reporting Dates

You pay your card off every time your bills comes, so you think you’re all good and you’re going to stop reading now. Wrong. Let’s picture a scenario like this:

• You have a credit card with a $10,000 limit.
• Your bill comes due on the 10th of every month. You get it, you pay it.
• You’re cuckoo about miles and points, so you put everything on your card every month — let’s say you put roughly $6,000 a month on the card. This happens between the 10th (when you pay your bill) and the end of the month.
• Your card issuer reports to the credit bureaus on the last day of each month.

If you pay your bill on the 10th and your issuer reported on the 12th of every month, you’d be golden. You would appear to always be at or near 0% utilization. But the dates don’t always align like that. If you’ve put your $6,000 on the card by the end of the month, it’s going to look more like a 60% utilization rate — and that means a lower score.

With regards to utilization, it’s not about when you pay your bill and if you pay it off. It’s about when the reporting happens and what your balance is at that time — hopefully at or under 30% of the limit. Credit bureaus only see a snapshot of you on that one date.

Here’s a more real world example:

• It’s the 10th. Your bill comes and you pay it in full.
• It’s the 15th. You purchase $6,000 worth of wedding expenses.
• It’s the 29th. Reporting happens tomorrow.

At this point, you could do nothing and you’d have a 60% utilization rate. Or you could pay half and have a 30% utilization rate. Or you could pay in full and have a 0% usage

Here’s my idea for a much smarter credit card to influence our behavior when it comes to spending and paying.

Cards are already moving the 16 digit number to the back to make the card look better. Let’s put the stuff that really matters up front to change our behavior when it comes to spending and paying our bill.

I’m curious to know if any of you knew about utilization or reporting dates. And if so, do you have your own ways for managing reporting vs. due dates?

Byron

Send us your story if you’ve been duped, conquered your finances, or want to give feedback. Send it to hello@lemon.co.