For those who don’t know what i’m talking about: One of the factors in calculating your credit score is how much of your available credit you are using. If you had 2 credit cards with a combined limit of $10,000, it’s best for your FICO score to not carry a balance of more than $3000 (30%)
I follow that rule. I’ve got a little over $10,000 in available credit spread over 3 credit cards. My utilization is rarely over 15%. Normally it’s 0% because I pay the balance each month but it jumped a bit after Christmas.
Lets say I take out a car loan for $20,000. My total available credit would now be $30,000. If installment loans count in that equation, I would now have a 66% utilization and it would be a number of years before I paid the car loan down enough to where I was under 30% total. A mortgage would be the same but an even greater number of years before you only owed 30% of the original loan.
My gut tells me that the 30% rule must only apply to revolving accounts otherwise most people would torpedo there credit any time they took out a car loan or mortgage. Am I right? This concerns me because I want and need a car but I hate the thought of my mid 700’s credit score dropping into the 600’s just because I got a car loan.
Ayup. Otherwise, with my student and car loans my utilization is… somewhere north of 60% as you say. And probably around 80-90% those first few years out of college.
But why worry about the score dropping if you get a loan? Isn’t getting affordable loans the whole damn point of having a good score? Unless you’re looking to get an mortgage in the near future, get the car if you need and want it. Your credit score will take a temporary hit from the new loan, but it’ll recover and ultimately increase if you make payments on time.
Do be careful about checking the details of loans, though. I have heard stories about people refinancing both auto loans and student loans in ways that the credit agencies treated as revolving debt.
I’m not spamming but I recently saw a TV spot for a free smartphone app called Credit Karma. Long story short it is the first app I’ve found that is genuinely free and gives you a genuinely accurate score. It also gives explanations as to the weight of each individual aspect of your credit. Did some quick Googling and it seems to be legit.
Credit Karma is a fine tool, but it doesn’t give FICO scores. It gives four TransUnion-proprietary scores, one of which is scaled like the FICO score and is intended to be very similar, but it has nothing to do with the company that is FICO.
Also, FWIW, they have a website; they’re not solely for smartphone users. Actually, I can’t even imagine what an app would do that their website does not, except be unnecessarily intrusive.
Credit Karma is a decent site, but they provide VantageScores and TransRisk scores which isn’t the same as the FICO score.
FICO is used in 90% of lending decisions, VantageScore is used in about 6% of decisions and TransRisk isn’t used at all.
Everybody actually has two utilization ratios, one for revolving credit and one for installment credit.
When calculating the FICO score (which is the most common of the scores) revolving credit ratio is worth about 95% of the credit utilization category (which is 30% of the overall score).
To get the maximum score out of the utilization category you should have all your credit cards carrying a balance of $0 apart from one card. This card should have a utilization of 1-10% (everybodies sweet spot is a little different).
Also make sure you are paying off the right cards to get that utilization. Most issuers report the balance shown on your statement, which means you’ll need to pay a few days before your statement posts to get that perfect utilization.
Applying for a car loan will likely ding your credit score by about 5 points (for the new application) after three-six months this point decrease should be gone. You’ll probably notice your score go higher at some stage as you now have a better credit mix (types of credit used: 10% of your total score, the bigger the mix the better).
ISTR that using 80% of the limit on our Home Equity line of credit dinged us significantly, even though we had, foolishly in retrospect, taken a smaller limit than we actually qualified for. We were doing some renovations, and asked for the HELOC to only be about $5-10k over what we wanted to spend. Apparently a HELOC is treated as revolving credit, since when we applied for a car loan about a year later, our FICO score had dropped surprisingly far. And counter-intuitively, when rates dropped again and we refinanced the HELOC with a higher limit but without any more draws, our credit score went up.