In my perfect world there would be no credit scores. And while I do not believe that credit is necessarily evil, in that perfect world of mine, there would be no need for any of that because it would be, well ... perfect!
Back to reality. There are myriad reasons we need to have good credit histories and excellent credit scores.
Like it or not, lots of things are now predicated on one's credit score. Take automobile insurance premiums, for example. Want the best rates? You'll need a good credit score.
Want to make sure that out of all the applicants, you get that really great apartment? You must assume that your potential landlord is going to look to your credit history to determine if you will make a reliable, on-time-paying tenant.
Are you vying for a job with a great employer? Better hope your credit file is clean and represents you well because employers are allowed to look at the way you handle your finances. We now live in a world where, in many situations, one's credit report is considered a character reference. Look in my credit file and you will get a good idea about how I manage my life. You'll see evidence for how seriously I take my commitments, a little about my personal integrity.
The most highly regarded, and used by most lenders and others who look at credit scores, is the FICO Score, and each of the big credit bureaus have their own version of FICO. How these scores are determined, based on the collected information in one's credit file, remains proprietary with the Fair Isaac Corp. that created the FICO Score.
We do have some information, however. One thing FICO?looks at is what it calls "utilization rate."
Your utilization rate is your credit limit compared to how much of that credit you are using at any given time, expressed as a percentage.
So, if you have a credit card with a $1,000 credit limit and a $100 balance owing, then you are 10 percent "utilized" on that card. You figure it by dividing the balance on the card by the limit on the card and then multiplying that figure by 100.
You can figure your "aggregate utilization rate" by adding together all of your credit card balances and comparing that number to the total of the credit limits on all of those accounts and multiplying by 100. Credit scoring looks at both utilization rates.
The best utilization percentage to have is 0 percent because then you have no credit-card debt and you're not paying interest. But, since that's not realistic for everyone, the best percentage is the lowest percentage you can achieve. In fact, according to FICO, consumers who have scores above 760 have an average utilization percentage of 7 percent.
There are reports all over the Internet that state 30 percent or 50 percent are the "target" percentages in order to achieve great scores. Those are false reports. In fact, nothing terrific happens at either 30 percent or 50 percent. Thirty percent is certainly better than 50 percent but not as good as 20 percent.
Think of utilization rates as you would golf: The lower the score, the better. Generally, to achieve the best credit score, your utilization rate should be under 30 percent, with the goal to get it down as low as possible.
Pay down your credit cards as much as you can. There's nothing good about having a lot of credit-card debt. It's expensive debt and it wreaks havoc on your FICO score. If you can get your debt-usage percentage to below 10 percent, your score will thank you.
Mary Hunt is founder of www.DebtProofLiving.com.
You can email her at email@example.com, or write to Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630.
To find out more about Mary Hunt and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.