This Is What the CFPB Says About Credit Utilization and Payment History

Many people who want to improve their credit scores don’t know exactly how. Logically enough, they look for guidance. And who better to consult than the Consumer Financial Protection Bureau (CFPB)? 

According to the CFPB, credit utilization and payment history are two of the most important factors used to determine credit scores. Let’s take a closer look at each one.

From the CFPB: Payment history, credit score, and more

The CFPB has this to say about loan payments: “Most credit scores consider repayment history as the number one factor for building a strong credit score.” This is true when determining both your FICO score and your VantageScore. 

Here’s a look at how factors are weighted when determining your FICO score:

• Payment History: 35%
• Credit Utilization: 30%
• Length of Credit History: 15%
• Credit Mix: 10%
• Amount of New Credit: 10%

And here are the factors that make up your VantageScore:

• Payment History: 40%
• Depth of Credit: 21%
• Credit Utilization: 20%
• Balances: 11%
• Recent Credit: 5%
• Available Credit: 3%

Your payment history isn’t the only factor shaping your credit score, but it is the most important.

Why payment history carries the most weight

Payment history is weighted most heavily because it’s the biggest predictor of whether you’ll pay on time in the future. 

Credit scores help lenders determine how risky individual borrowers are to lend to. People who have failed to repay an account as agreed are statistically more likely to do so again. 

How missed payments affect your score

Even one missed payment can cause significant damage to your credit score. Most lenders only report payments that are at least 30 days late to credit bureaus, although payments that are late by a few days can still incur late fees.

A missed payment can be enough to drop your score by 100 points or more, and like most negative marks on your credit report, it will remain there for up to seven years.

You might be surprised to learn that a single missed payment will usually do more damage to a high credit score than to a lower one. That’s because missing a payment is a major red flag. It indicates that something might have changed in a borrower’s financial circumstances.

If your score was already low, lenders already saw you as a risk, so one more missed payment may not lower it that much.

Ask the CFPB: Credit utilization and your FICO score

Your credit utilization is the second most important factor when determining your FICO score. The CFPB suggests keeping utilization below 30% of your available credit. However, the bureau notes that you can use credit cards to build credit without paying interest:

“You don’t need to carry a balance on credit cards to get a good score. In fact, you don’t need outstanding debt at all. Paying off the balance in full each month helps get you the best scores and keeps your interest costs as low as possible.”

The CFPB has more answers to common questions about credit utilization.

What counts toward your utilization rate?

According to the CFPB, credit utilization is calculated using revolving lines of credit like these:

• Credit cards
• Home equity lines of credit (HELOCs)
• Other personal lines of credit 
• Credit cards that list you as an authorized user

Installment loans, including personal loans, car loans, mortgages, and student loans, aren’t included in this calculation.

How can you keep utilization low?

Paying off your full statement balance each month can help you keep credit utilization to a minimum. So can keeping credit cards open after you pay them off.

Here’s an example: Imagine you have two credit cards. One has a $3,000 limit and a $1,500 balance. The other has a $3,000 limit and a $500 balance. Right now, your credit utilization is at 33.33%.

Now, suppose that you pay off the card with the $500 balance and close the account. Because your only open card has a $3,000 credit line and a $1,500 balance, your credit utilization has jumped to 50%. 

Suppose that you keep the card open instead. If you use it for a small purchase now and then and pay it off monthly, your credit utilization rate will hover around 25%.

Ready to start building credit?

According to the CFPB, payment history, credit scores, and credit utilization are all connected. And if you’re working toward building or rebuilding your credit score, it can be hard to keep track of everything. 

That’s where we come in. Kikoff is a credit-builder app designed to help anyone improve their score while learning about personal finance. We connect you with credit lines and other tools to help you start building credit right away.

Joining is free, and we don’t check your credit. Create your account with us today!

Sources:

https://www.consumerfinance.gov/ask-cfpb/how-do-i-get-and-keep-a-good-credit-score-en-318/ 

https://www.consumerfinance.gov/ask-cfpb/how-long-does-information-stay-on-my-credit-report-en-323/ 

https://www.consumerfinance.gov/ask-cfpb/how-do-i-get-and-keep-a-good-credit-score-en-318/