What does high credit utilization really mean?

Question

I've heard and read that high utilization of credit hurts, but what does that mean exactly? Does that mean high utilization month-to-month, or simply high utilization at all, even when paid off in full at the end of the month?

Scenario: At the beginning of the month, you make a purchase that is 70% of your credit. Supposing that you don't use the credit card for the rest of the month and you have the cash to pay it off, does it matter when you pay off the credit card? Immediately or at the end of the month?

Does the length of time of that high utilization, even within one month, affect your credit score/limit? Is it simply the fact that you used that credit at all an issue?

Answer 1

Some people are paranoid about day-to-day or month-to-month fluctuations in their credit scores, perhaps because they have signed up with various on-line services that monitor their credit scores and promptly report any changes.

Suppose your credit limit is $5000 and you charge $3500 (70%) on the card each month for several months in a row and pay the full balance promptly every month; maybe even on the day the monthly statement is issued. Yes, it may "look bad" to the reporting agencies and affect your credit score negatively since the agencies cannot tell the difference between your actions and those of someone who charged $3500 once and is paying just enough each month to keep the balance at $3500. But, your credit card company knows the difference between you and the other guy, and believe me, the company would far rather have you as a customer than the other guy. Since the credit-card company charges the merchants fees (anywhere from 1% to 5%) for processing the transactions, they earn far more from you than the other guy, and have comparatively little risk of having to turn over the account to a collection agency. You will likely get an increase in your credit limit without even asking for it in a few months. They want to keep you rather than lose you to a competing offer from another credit-card company.

Of course, as in all cases, YMMV.

Answer 2

Timing matters. I wrote an article Too Little Debt, in which I showed (with Steve's chart from Credit Karma) that by paying my card in full before the statement date, I got dinged that month for zero utilization. My advice is that if you wish to utilize over 20% of your credit in a given month, make partial payments during the month, just don't let the statement get cut with zero use. To be clear, the card issuer reports the statement amount each month. You can have a $5000 line, charge $4000/mo, never pay a cent in interest, and have a "D" rating on the report card. It's a game, these are the rules. You can play, or not. You can even note the absurdity, you just can't change the rules.

Edit - since posting this answer, my main credit card changed issuers. The date the balance is reported no longer coincides with the statement date. While the statement date is now the 15th of each month, the balance on the last day (30th or 31st) of the month is what is reported to the agencies.

Answer 3

Credit card utilization is basically the sum of the monthly balances of all cards that report to the credit agencies. The amount is reported even if you pay it off in full each month: whether you are just carrying a balance or making large purchases and paying them off each month, it will look the same.

This has two notable results:

• From just looking at your credit report, you can't tell the difference between carrying a large balance and making small monthly payments, or making large purchases and paying it off each month. This can work for you or against you but generally high credit utilization is bad for your credit score.
• You can keep your credit utilization in the 1-20% range (some people say this is the sweet spot for your credit score) by making small purchases each month and then paying off your balance.

Here is a graph from Credit Karma that shows how credit utilization affects your score. Overall 30% of your credit score is based on credit utilization/amount owed, according to Fair Isaac.