smart spending

12 financial tips for 2012

Credit cards: Balance the utilization rate
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Bonus! Credit cards: Balance the utilization rate

A big contributor to your credit score is your credit utilization rate, which takes into account the amount you owe compared to how much credit you have available.

For instance, say you have three credit cards that combined have a limit of $1,000. On those three, you have charged a total of $800. Your utilization rate is 80 percent, meaning you have used 80 percent of your available credit. That's high and will hurt your credit score, because research has shown consumers with higher utilization rates are more likely to miss paying their bills.

So what's the optimum utilization rate? FICO, the developer of the most widely used credit score, doesn't give guidance, but says lower is generally better. Oddly enough, there is a point that is too low, according to John Ulzheimer, president of consumer education at SmartCredit.com.

"You earn more points if you have a 1 percent utilization level versus a zero percent utilization," he says. And here's an unexpected kicker.

"And you actually earn more points if you are (more than) 100 percent utilized than if you are exactly 100 percent," he says. "They are both terrible, but the (more than) 100 percent is the lesser of two evils."
-- Janna Herron


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