Confusion About Utilization Rate

Question

Hey Guys, I am completely new to credit, as I am a college student. I am trying to build a strong credit score, so I want to make sure I take all the right steps. As of right now I only have one credit card. I got approved for Capital One Journey, with a credit limit of $300. I have a few questions as to how I should go about spending and paying for this card. I was originally planning on spending a large portion of the $300, then paying off my whole balance by the due date. But I am reading that I should not spend more than 9% of my credit limit, to keep my utilization rate <9%. Is this true? So, essentially, I cannot spend more than $27? With such a small credit limit, this seems like a ridiculous amount to which to limit myself, so I am wondering if I am understanding the utilization rate correctly. Or does <9% utilization rate imply I should carry a balance of less than $27 and not pay off the balance in full each month? Aren't you supposed to never carry a balance (especailly with such high student credit card APR rates)? I am confused..help! Thank you so much! 

Answer 1

Thomas_Thumb wrote:
takeshi74Valued Contributor wrote: I'd be careful with that advice.  Utilization isn't just a scoring factor but a risk factor as well.  80% is very high regardless of the state of credit one is in.  Short term high utilization generally isn't an issue but prolonged high utilization can get one into trouble. Let me clarify my statement. I don't mean to encourage persistent high spending as it is not necessary to demonstrate ability to handle credit. My thought was more along the line as follows for monthly utilization: 20%, 10%, 50%, 10%, 80%, 0% - then request a CL increase and if asked: "what credit line amount you are looking for?" perhaps say: I would like a CL of $750 but $500 would be enough to ----. If there is only one credit card open to report; a high utilization on a low limit card is not unexpected. If the balance is paid in full every month the credit card company will know this when reviewing payment history. Paying in full by due date demonstrates ability to handle credit to the issuer. Ability to pay a high percentage of an existing CL in full sends a strong signal that you can handle more credit. The "pays as agreed" will show on a credit report regardless of when you PIF. However, the balance reported to the CRA depends on payment timing. I PIF monthly according to statement just because I find it so much easier than some type of timing of payments to show a zero balance at some moment in time. Don't obsess over payment timing to show a zero balance (really it is best to show a non zero balance when you only have one card) - Key is to avoid a late payment and PIF if possible. It is important to use credit to get credit.  You are 100% right on that, just letting non-trivial balances report does change your FICO instant-in-time calculation.  I would also agree when just starting out there's far more important things than obsessing about revolving utilization, you only are looking to keep a couple of lenders happy at that point and can change up the metrics before you take the step into the second tier. If you're not making an application not much really matters unless someone decides to do an AR and take exception to it (I let my balances fall wherever 90% of the time and even let a new tax lien hang out on my report for several months before getting the paperwork done, just didn't matter as I was credit idle) and once you get a large enough buffer from a limits and tradelines perspective, the calculation becomes trivialized when it comes to revolving utilization metrics; however, a lot of people aren't at that point yet.  I might be after my post-mortgage app spree, but I'm not today on 9 lines at 34K in limits with my typical card habits. That said I run as much of my financial life as possible through credit cards and I'd really suggest everyone do the same; don't run up debt you can't simply write a check for (financing large purchases at favorable interest rates not withstanding) but I can't see ever going back to a cash-based existence as being optimal for anyone but as a last resort.