Many experts suggest that consumers keep their credit-card utilization ratios at 30% or below (some even suggest that 50% or lower is fine). I think that’s too high. My anecdotal evidence, using only my experience, suggests that a better utilization ratio is 10% or lower. What’s more, my recent experience also shows just how sensitive FICO’s utilization calculation can be.I recently allowed one of my credit cards to report a balance of nearly $900. The balance represented a utilization ratio of 11% on this particular card. (For those who don’t know, utilization is the amount of credit that you are currently using relative to your credit limit. If your credit limit is $5,000, and you’re using $1,000 of that limit, then you’re using 20% of your available credit. Thus, your utilization is 20%.) When my card reported this balance to the credit-reporting agencies, I received an alert from FICO Score Watch (full disclosure: I have a financial relationship with myFICO.com; I get a commission if you use one of the FICO ads on my site). This $900 balance dinged my score by nearly 30 points. My Equifax FICO score plunged from 787 to 760. Yikes. While I’ll regain those lost points when my new balance — consisting of purchases for the past month (along with the $900 payment I made) — gets reported to the credit-reporting agencies during the next five days or so, I should have been more attentive to my utilization ratio. And don’t forget: utilization is calculated per card — and on all cards combined. Don’t let either get above 10%.Still, does anyone think that losing 27 points is warranted? For a $900 balance? On a single card? Did I really become that much more risky? And what might have happened if I allowed my balance to represent 30% of my credit limit? I can only imagine what the impact might have been.For the record, I think that it’s silly that FICO thought that my 11% utilization and $900 balance on a single credit card was worth nearly 30 points. But it is what it is. FICO is sensitive when it comes to utilization. I’ve always known that. I’m not here to cry about it — especially since I’ll regain the points when my utilization dips below 10% again. I’m merely pointing out my experience so that readers understand just how important it is to keep utilization low.By the way, I used the word “allowed” earlier in the story. I used that term because I don’t permit my utilization ratios to get above 10% on any card (except this time). Even though I pay my credit-card balances in full, I still — like everyone else — need to watch the amount of credit I use each month. If anyone wonders why I often pay my balances in full before the statement closes, let this experience serve as a reminder.Experts recommend credit-card utilization ratios of 30% or lower. For me, that’s too high. It should be too high for you as well. My readers would be better served by keeping that number at 10% or below instead.
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