What Is Revolving Utilization and Why Is It So Important to Your Credit Scores?

If you want to have great credit scores then pay your bills on time every month. The previous statement is great advice; however, it is incomplete. Simply paying your bills on time is not enough to achieve and maintain great credit scores. In fact, only 35% of your FICO credit scores are based upon your payment history. The other 65% of your FICO scores have nothing at all to do with how timely you pay your bills.

30% of your FICO credit scores, plus a significant portion of your VantageScore credit scores, are calculated based upon information found in the "Amounts Owed" category of your credit reports. The primary factors considered within this category are largely based upon those little pieces of plastic you carry around in your wallet: your credit cards.

What Is Revolving Utilization?

Revolving utilization is a term used within the credit world to describe how much or rather what percentage of your credit card limits are being used. Your revolving utilization ratio is also known as your debt-to-limit ratio or your credit utilization ratio. It measures how much of your credit limits are in use on each of your credit card accounts and expresses that calculation as a percentage. Here is a quick look at how revolving utilization is calculated.

Credit Limit: $5,000
Balance: $3,500
Revolving Utilization: Balance ($3,500) Divided by Limit ($5,000) = Revolving Utilization (70%)

Why Is Revolving Utilization Considered in Your Credit Scores?

Your revolving utilization is an important consideration in your credit scores for one very simple and important reason: it is statistically predictive of higher credit risk. When you carry outstanding credit card debt on your credit reports you represent a higher credit risk than someone whose reports show paid off credit card balances.

All debt is not created equal. When you take out a mortgage loan or an auto loan, for example, you are opening an installment account. Credit cards, by comparison, are revolving accounts. Installment debt is much less risky for lenders to extend because the debt is generally secured by some sort of collateral (aka your house or your vehicle) which the lender can seize and resell in the event you stop making your payments. However, credit card debt is different.

Because of the nature of credit card debt, it is much more predictive of increased credit risk than installment debt. Think about it. If you begin to struggle financially due to an illness, divorce, job loss, or even poor financial management habits like overspending, which is the first obligation you will probably allow to slide in the event that you have more bills than money at the end of the month? Most likely you will not skip your mortgage payment, your rent, or your auto loan payment if you can help it. Credit card payments, however, are much more commonly skipped in the event of a financial shortage.

Additionally, increased credit card balances might indicate that a financial problem is looming. If a consumer loses his job then it is very common to rely upon credit cards to help finance every day expenses until a new source of income can be secured. As you can easily see, if your reports show that you are revolving balances on your credit cards from month to month, especially high balances when compared with your credit limits, it might make you appear to be a higher credit risk in the eyes of a lender.

The Good News

Although revolving unpaid credit card debt on your credit reports from month to month will almost certainly lower your credit scores, you can currently regain those lost points rather quickly, as soon as you start to eliminate the debt. The other goods news is that the score increase you may be eligible to earn from paying down your credit card balances and lowering your credit utilization can be earned incrementally (instead of an "all or nothing" scenario). In other words, as you pay down your credit card balances little by little you should begin to experience small credit score increases. You do not have to pay a credit card balance all the way down to zero on your credit reports before you can hope to receive a score boost.


About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter and Instagram.

Do I Have Too Many Credit Cards?

Credit cards can have a big impact upon your credit scores. Because of this fact, many credit savvy consumers often wonder about the ideal number of credit cards to have open. These consumers often pose questions such as “do I have too many credit cards?” or “should I open more credit cards?” or even “should I close some of my credit cards?” However the question is worded, what the person asking the question really wants learn is the perfect number of credit card accounts needed in order to achieve the best credit rating possible. Unfortunately, the idea that there is a magical number of credit cards needed in order to reach some credit score sweet spot is a bit of a myth.

Managing Your Credit Cards

Instead of focusing your energy on finding the right number of credit cards to open, you should instead shift your focus to how you should manage your credit cards. Credit scoring models, like FICO, pay a whole lot of attention to something called your revolving credit utilization ratios. For all of you non credit nerds, revolving credit utilization ratio is a credit industry term used to describe the relationship between your credit card balances and your (open) credit card limits.  The formula used to calculate your revolving credit utilization ratio can be a little complicated, but the principle behind the formula is pretty simple to understand. It is important to keep your revolving utilization ratios low at all times. The higher your credit card balances, the worse the impact will be upon your credit scores. As a rule, you never want to revolve credit card debt from one month to the next.

How Does My Number of Open Credit Cards Impact My Credit Scores?

If you have been paying attention so far then you may already realize that the question above is actually a trick question. Remember, how you manage your open credit cards determines the impact which those cards will have on your credit. The truth is that there is no right number of credit cards to have open. You could have 20 open credit card accounts, all with zero balances, and have very good credit scores. Conversely, you could have a mere 2 credit cards which were maxed out (meaning that you charged the cards up to the full, available balance) and your credit scores would probably be impacted very negatively.

What If I Don’t Have Any Credit Cards At All?

If you currently do not have any credit cards, then it is a good idea to start “shopping” for a little plastic. CLICK HERE to compare credit card offers, rates, and benefits. Find the cards which are the most appealing to you and apply. Note: if you currently have no credit or bad credit then starting out with SECURED CREDIT CARDS may be your best option. Once you have the cards, be sure to manage them well and commit to never charging more than you can afford to pay off that same month.

You will find people who disagree with me and believe that credit cards should be avoided at all costs. And yes, credit card debt should be avoided. I agree 100% that credit card debt is a bad thing. Credit card debt will cost you a lot of money and it will harm your credit scores. However, properly managed credit cards with zero balances are an excellent way to build positive credit. Building positive credit can help to set you up for success in life (i.e. lower interest rates on your mortgage, lower insurance premiums, lower utility deposits, etc.). In fact, building healthy credit is one of the most important goals you can have.


About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter and Instagram.