Personal FinanceTips and TricksCredit scores and credit card management


There are perhaps hundreds and hundreds of credit card offers out there, including store offers as well as the major financial organizations we’re familiar with. Offers with 0% introductory rates are very tempting, and most can be taken advantage of if used responsibly. But is it worth the debt? In this nugget, we will talk about the 30% utilization ratio and the effects on your credit score.

How bad will a credit score be affected for having a high balance?

We all know that carrying a high balance on a credit card will likely hurt your credit score. If the high balance is carried for a short term, it won’t generally do much damage to the credit score, as the high balance will be presumably paid in full. Ideally, you should try keeping your usage below the 30% credit utilization ratio. Even better, if you can, seldom use the credit card. Those 0% offers can cause you to spend more than you want for rewards you don’t really need. Yes, earning points, if done wisely can be beneficial. But often, it requires planning and knowing how to play the game. If you do not have time to do that, it is rather not worth it and we recommend just using your card rarely; perhaps once a month to put gas in your vehicle to keep it active, and paying off the balance by the due date.

There are several credit scoring models but the most widely used is the FICO model. Another model you may have seen is the vantage scoring model that is displayed on Credit Karma website.  A credit score depending on the scoring model typically ranges from 300 – 850 which is designed to represent your credit risk.

How credit score works

Your financial institution that issues your card typically reports to all three major credit bureaus (Equifax, Transunion and Experian) once a month. Once reported, your new balance is reflected on your score at the time of reporting. For example, if the issuer reports the data while your balance is still high, you may see a lower score as a result. This is why it is important to make your payments by the due date (not even during the grace period offered by your bank, which may still negatively affect you with the credit score companies). A credit utilization ratio of over 40% is beyond what experts recommend. 

Store credit cards should be managed the same way, meaning use them less frequently and pay off the balance.

It should be noted that the 30% credit utilization ratio affects all credit cards you may have, not just one. For example, if you have a Wells Fargo credit card, one with Navy Federal Credit Union and another one with Capital One, you should make sure your usage with all three credit cards combined stays at below 30%. 

A different perspective

There is another side to this credit card phenomenon. A point of view that asks the question, “Do we really need a credit card, and for what purpose?” Some may say to build their credit score, others may say because of the protection it offers and the vast majority would love it for the perks such as the cash back offers, frequent flyer miles, reward points, one time bonus, insurance etc. All of this might sound enticing but it comes down to the individual and how disciplined they are. You have to be an extremely disciplined person to keep up with the ownership of 1 or more credit cards. On the other hand, just using your debit card is another possibility and always carry some cash incase of an account freeze due to a data breach or account hack.

So what is our recommendation at KFiCoaching? Avoid credit cards in general if you can, that would be the wisest approach. But if you must, limit yourself to 1 credit card in which you do your transactions and pay your balance off at the end of the month or credit card billing cycle to avoid paying interest to the credit card companies. Keeping the utilization rate under 30% is the ideal sweet spot as already mentioned above, but it is better to stay below 10% utilization to keep you out of trouble and prevent you from racking up massive credit card debts.

This article was written in collaboration with Ramses Coly.

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