Both play a role for sure. I would say your utilization rate is more important, but once you get a decent limit it will become less important.

Wanderer wrote: No interest. Rotated the cards so a balance was always in the grace period following the statement cutoff.

A legal loophole.......I love it.

So the way I'm seeing this, it doesn't matter if the limit is 100 dollars or 10,000. That won't affect your score as much as the utilization rate on each. Is that about right?

I agree with Egghead that it takes a lot of commitment to test a theory to this extent. Way to go! I'm determined to get my score up a bit in the next year and I think right now I'm probably around 20% to 25% utilization. It wouldn't be an issue to pay it off now and then keep things at 1%, but I thought I was doing the right thing staying around 20% up until I read this.

Very clever! I have not thought of that before.

No interest. Rotated the cards so a balance was always in the grace period following the statement cutoff.

That's some major commitment to testing a theory Wanderer! You mentioned it wasn't good to get to zero percent utilization, so you left a small balance and ate the interest to maintain a higher credit score?

In using myself as a test dummy, over a two year period of time I experimented with my credit in all three bureaus and found utilization around 1% achieved my highest scores. Note, this was not some estimator program, this was based on my real world credit bureau reports. Yes, there is lots of information that says for the best credit scores stay under 30%. Truth of late, the prevailing thinking runs under 9%. I have tried that and still found my best scores come in under 1% utilization. Now, you don't want to pay all your bills and hit 0% utilization as your scores will drop as I tried that too!!!

Yes utilization is definitely looked at. From everything I have read, your goal should be to have a utilization rate of 10% to 30%. In theory, you would have a higher score over time if you have a slightly higher utilization rate (say 25%) vs. a 1 to 2% utilization rate, holding everything else constant. Credit card companies want you to use your credit card, if you use it correctly, overtime your credit score should reflect that use.

All other factors aside, I believe having a higher credit limit that you don't utilize improves your credit score. This positively affects the ratio of how much credit you have to how much credit you're actually using.

I've always thought it was both the ratios and the utilization. Credit scores and how they calculate them is such a weird thing. We charged a vacation this year and our balances are pretty high right now. It's going to take about six months to pay it off, so that isn't too bad, but I hate having debt.

I was under the impression that the credit bureaus look at your balance to credit limit ratios. I did not realize that they look at utilization as well on a monthly basis. I know that having a lower balance compared to your credit limit is beneficial for your credit score. Having a higher limit therefore would be a good thing unless you would be more apt to use the card more.

I should clarify the utilization percentage is only 1 factor that affects your credit score, there are many others as well. The obvious number 1 rule is to pay off your credit card each and every month. Regarding the utilization percentage, the credit agencies look at a monthly average, and not per day utilization. Let me walk you through an example as that may be easier to explain.

If I have a credit card limit of $100, I should look to allocate $10 to $30 of expenses each and every month to this credit card. If I charge $20 (20% utilization) each month and I pay off my credit card every month, over time my credit score should increase holding everything else constant. Now 1 IMPORTANT THING TO NOTE, is if I only charge $5 (5% utilization rate) per month to this credit card, it doesn't mean that is going to hurt my credit score per say, but people argue your score would increase slower than the previous example.

I am curious about one thing when it comes to utilization and the effect it has on your credit score. If you pay your card off each month, doesn't that change your utilization percentage and lower your score until you charge again?

Absolutely, you need to have the know how and ability to resist yourself from overspending. But from a quantitative perspective, the better utilization rate you have, the better your credit score is going to get.

As long as you're good with paying your credit cards off, I agree with Frank - within reason. For those just getting out of debt, I tend to recommend that they have their limits lowered and to close accounts as they go, but that is for those who aren't very good at resisting temptation.