Nicolas Vega, a business reporter at CNBC, misled thousands of consumers by his recent article that credit utilization ratio makes up 30% of your FICO credit scores. His statements are incorrect, inaccurate, and misleading. There are several other debt-related factors that have an impact on FICO credit scores.
Credit utilization is the amount borrowed on a credit card and its credit limit. If someone has a balance of $5,000, and a credit limit of $10,000, the credit utilization ratio is 50%. If on the same credit card the balance drops to $2,000, the credit utilization ratio is 20%.
Credit utilization ratios can have a significant impact on FICO credit scores. Scores can drop upwards of 40-50 points from just one account with a high utilization ratio over 100%. That means a consumer has borrowed more than the credit limit. When multiple credit cards and utilization ratios above 50%, the drop can be 60, 70, and even upwards of a 90 point drop.
Additionally, those consumers just trying to establish their credit profile or reestablish their credit profile will see b roader score changes than those that have a deep credit profile. For example, an 18 year old who opens their first account, that being a new credit card, can see FICO points decline of 30 to 40 points if that consumer borrows right up to the credit limit. A person, with a credit card opened for 20 years, can borrow right up to the credit limit and the drop will not be as much – say 15 to 20 points lower.
However, utilization ratio is NOT 30% of FICO credit scores. It can drop FICO scores fairly quick when multiple credit cards balances are high. However, the drop in FICO scores is not solely to the utilization ratios. There are eight measurements of debt that determine the impact on your FICO Scores.
- Number of accounts open.
- Number of accounts with a reported balance.
- The reported balance on a line of credit (not utilization ratio).
- The ratio from the balance in relation to an initial loan amount on an auto loan or other types of loans.
- The number of bank credit cards open
- The number of bank credit cards with a reported balance.
- The balance to credit limit or utilization ratio on a credit card or other lines of credit.
- The total utilization ratio of all consumer debt as a percentage of the total credit limits and initial loan amounts.
Mr. Vega does add correctly that raising a credit limit will help lower a credit utilization. A person can also make payments before the lender reports to the credit bureau, usually a day near then end of each month. A consumer can also get quick FICO score points by paying off most small balance credit cards.
Mr. Vega also write the following incorrect statement:
"Experts generally recommend keeping your utilization rate under 30%, ideally closer to 10% if you can. That’s because credit card companies view high utilization rates as a red flag that you might not be able to reliably pay back the money you owe."
For FICO Scores, it is below 5%.
FICO Scores are very complicated. Stating that utilization ratios are 30% of a FICO score is not accurate and keeping a utilization ratio at 30% of a credit limit is also wrong. It is just not that simple. Knowing all the factors and the correct guidance can help consumers better navigate to higher FICO scores over a shorter period of time.
CNBC is much better than this. Make sure correct content is put on such platforms so consumers can know the accurate information. If a reporter does not know it, don't put anything out there.
Here is the link to Mr. Vega’s article.