This one gets people mad because so many use credit cards and such for points, miles, rewards, airport lounge access, cash back, etc. I’m not knocking those when I explain your utilization rate! All I’m saying is when lenders pull your credit, at any given time we might see that you have charged up almost your whole credit limit for the month. The argument is always that “but I always pay it off in full” and that might be true if we look at your history. BUT…. we have to use certain metrics required by loan programs and when we pull your report it might not show for THIS month that you have paid it. It also shows a habit of maxing your cards which can worry lenders because what if your “stable” job ends tomorrow? It’s always a possibility as we’ve learned many times in this millenium already. If your job history is very stable though with consistent pay, unlike self-employed income for some that tends to vary or be seasonal-dependent, then it’s not an issue as much but it hurts your score.

Your score is calculated with this ratio so your score goes up and down but whent it’s pulled it might show a lower score and a large DTI because of a large unpaid credit card balance AT THAT MOMENT. Don’t fret though because I just tell future buyers to ask for a credit limit increase. Don’t you dare use it though! This means even when you keep your spending exactly the same, it shows at any given time a max 30% ratio which improves your score and DTI for lenders. You don’t lose anything if you don’t start spending more. Keep charging what you normally do. If you run up $3,550 on your $5k credit limit, see if you can get your limit extended past $10k. If you get your limit raised to $12,000 you are a hair below 30% so don’t exceed that or get it raised to at least $15,000. Utilization also accounts for TOTAL credit limit so if you have another card you don’t use, never close it because that hurts your score and utilization. Instead leave it open and let that help you. If you get a limit raise on one card and don’t use the other much or at all, it helps you actually!

Let’s say you have two or three credit cards and you add up just the limits to them all first, and it comes to $25,000. If your current balance across all cards (add all balances together into one number) is below $7,500 then you’re fine! Your total credit available across all cards is $25,000x.3=7500. That’s your max to charge every month. If you want to know where you’re at, add up all of your balances together and all of your limits together. Divide the TOTAL BALANCE /TOTAL LIMIT and it should equal exactly .3 or less. If it does, you’re fine. If not, you need a credit limit increase somewhere or use somethings on debit. You can also pay purchases off right away but do it within 48 hours or less so they don’t show on a credit pull. .3 is a credit utilization of 30% exactly so don’t exceed it by an decimal more. The lower the better if you can show lenders you use no more than 30% of your card. It’s how credit scores work and what helps you look better than ever to a lender.

Your utilization rate is 30% of your score and a lot of your DTI when buying a home so be very careful and strict with your spending. Also understand depending on income and other debts, your lender might do your preapproval and still recommend you pay down to 10% utilization rate until the sale is closed because underwriters want to see a much lower utilization for some clients. If you have a current mortgage, car payments, student loans, and other credit dings, they might need you to do this to improve your utilization because it drops your DTI, raises your score, and is more likely to be approved. It depends on client but this is not uncommon so be prepared when you go to buy a house. Some buyers do need to do it in order to be approved.

Keep in mind though, that age of credit is also important so don’t go adding new cards just to have more limits you won’t use to make it look like you’re only spending a fraction of what you have in cards. New account openings, or new financing of anything, is bad for your score and lenders so that’s why it’s more important to work on getting your credit limit raised versus new cards. Those drop your score and shows lenders you open new accounts which indicates the intent to spend more or open accounts for discounts that retailers advertise. Not good money habits. Don’t go opening a Macy’s card to help your utilization. It doesn’t work that way! Whatever your oldest card is, see if they’ll raise that one at all. Anything helps. You can always ask again in six months. If you practice good habits and have an excellent payment history, you’ll impress their creditors too and the company will eventually be happy to oblige when they look at your account history. Credit building is a long term game and it’s how you to build your credit from scratch when you’re just starting out.

The rest of your score is obviously payment history being another huge chunk so never miss payments, we see that as lenders and it’s not good. The same goes for your mortgage payment or utilities if they end up reporting your deliquincies to the credit burueas. Any late or missed payment in the last 12 months is a red flag for lenders so be on time!! It is so important to not ever get behind on anything. We look at everything that costs money and uses your score. If you get behind on the electric bill, they have your score from when you obtained service and they will report you to the credit reporting agenices if you owe them money. Collections of course hurt you too. Make your payments!!

For homebuying purposes, medical debt is not a big indicator to us but go to http://www.annualcreditreport.com for a free report (not score) and it’s a very detailed and accurate report similar to what lenders use. It shows all accounts with your name, the age, amounts, etc. Make sure you don’t have collections, accounts you don’t have, any fraud issues, and make sure your good history is being reported by all creditors. If anything looks wrong, call the company and find out why. Do this every year and make sure to read it so nothing is overlooked and you don’t miss inaccuracies or identity theft.