Credit score utilization ratio misinformation
Exploding a myth. This one is mathematically impossible.
| By Greg Fisher
myFICO.com illustrates factors of the FICO score with a pie chart. The percentages in the chart "reflect how important each of the categories is in determining your FICO score." 30% is a number assigned to an entire category called "Amounts Owed." 6 items comprise the category:
- Amount owing on accounts
- Amount owing on specific types of accounts
- Lack of a specific type of balance, in some cases
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
- Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
The last two factors within that category are the only ones that have anything to do with any kind of ratio. The entire category equals 30%. So, if you believe the media circus-- that the so-called "utilization ratio" is 30%-- then the other 4 factors ("Number of accounts with balances," for instance) must equal zero. And of course, as FICO confirms, that is not true.
In June, the decision management, predictive analytics and credit bureau risk score company clarified the issue. FICO spokesman Craig Watts responded to a question from creditscoring.com:
| creditscoring.com: | What percentage of the importance in determining the FICO score is reflected by the "Proportion of credit lines used"? |
| FICO: |
Hi Greg,
As you know, the weight of any scoring factor in the FICO model can vary from consumer to consumer, depending on what else is on the consumer's credit report. When my company explains FICO scoring to a general audience, we apply general weights to major data categories such as, "Amounts Owed is 30 percent of a typical consumer's score." We don't break that weighting into finer parts for individual factors, both to avoid unintentionally misleading the public and to protect the model's proprietary information. |
Contrary to that are various emphatic proclamations overstating the significance of the "utilization ratio":
"One of the factors used to calculate your credit score is what's known as the 'credit utilization ratio,' which is based on the amount of credit you have outstanding as a percentage of your total available credit. When you close a credit card account, the amount of your total available credit shrinks, which could lead to a higher utilization rate. This ratio accounts for 30% of your credit score." - USA Today, 10/19/09
"Your 'credit utilization' ratio, which reflects to the amount you've borrowed as a percentage of your available credit, accounts for 30% of your credit score." - USA Today, 1/16/2009 (amplified by ABC News)
"The amount of debt you have outstanding, as a percentage of your available credit limit, accounts for 30% of your score." - USA Today, 1/28/2008
"Peters says that nearly a third of your credit score is dependent on how much you owe, compared to how much you have the capacity to borrow -- your debt utilization." - ABC, 5/29/2009
"Sure you save on interest and you don't have to pay for the whole thing up front, but in some cases these deals can wreak serious havoc on your credit utilization ratio, a factor that comprises almost 30% of your credit score, says Barry Paperno, consumer operations manager for Fair Isaac Corporation, a Minneapolis-based company that developed the FICO scoring formula." - SmartMoney.com, 12/09/2008
"The ratio of debt to available credit accounts for one-third of your score." - SmartMoney.com, 1/4/2008
"The second-biggest factor in your score is how much you owe vs. how much credit has been extended to you." - Money, 8/24/09
"Your debt-to-credit ratio, which makes up 30 percent of your FICO score, is the amount of revolving debt (i.e. the credit card balances) in relation to the amount of available credit (i.e. the credit limits)." - (ironically, in an article named) "5 Common Myths That Can Destroy Your Credit Score," FairLoanRate.com, March 30, 2009
"So one-third of your score measures the amount of debt against the credit limit,' Opperman says." - Bankrate.com via AOL.com, 4/01/2009 (April Fool's!)
"'So one-third of your score measures the amount of debt against the credit limit,' Opperman says." - BankRate.com, 1/26/2009
"The measure of debt to your credit limits counts for a whopping 30% of your overall credit score." - The Motley Fool, 4/28/2008
"High debt in relation to how much you still have available to borrow is a blot on your credit report. Such a 'credit utilization' ratio accounts for 30 percent of your credit score, said Paperno." - Newsday, March 3, 2009 (amplified by Newport News Daily Press, chicagotribune.com, Channel 8, Cleveland, Orlando Sentinel, and the LA Times)
"30 percent Credit Usage: This measures the amount you owe versus the total amount of credit available. Your credit score can be lowered when you use more than 50 percent of your available credit for each account." - CBS, The Early Show, 8/15/2007
"According to Fair Isaac, a credit scoring bureau, about one-third of your score depends upon your 'utilization ratio,' or how much of your available credit you actually use." - Kiplinger, 2/2007
"This ratio between credit card balances and credit limits is known as your credit utilization and counts 30% of your credit score." - About.com
"The next 30% of your score is based on the amount you owe relative to your available credit. This is commonly called your "credit utilization ratio" and you want a low use on a high limit." - Huffington Post, 1/23/2009
"Because 30 percent of your FICO score is based on amounts owed on revolving credit, I can't say it enough: watch your balances!" - Huffington Post, 10/21/09
"30% — Credit Utilization - The ratio of current revolving debt (such as credit card balances) to the total available revolving credit (credit limits)." - Wikipedia (see 4/22/05 entry)