Credit Cards

My credit utilization exceeded 50%. This is what happened to my credit score.

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A bad time of purchase can have a great impact on your credit score.

Key points

  • Using too much of your available credit can cause your utilization rate to skyrocket.
  • A utilization rate above 50% caused my credit score to drop 25 points.
  • Paying the balance in full reversed the damage completely.

This is the story of how an untimely credit card purchase turned into a massive credit score drop. While it has (mostly) a happy ending, there are some lessons to be learned.

Not long ago, a member of my family faced surgery for a broken arm. Now, we have health insurance, but that insurance comes with a hefty deductible, one that meant we were still on the hook for a few thousand dollars in medical bills.

Thanks to our handy emergency fund, we had the cash to cover the cost. But who walks into the surgical center with a suitcase full of cash? No, at least this medical drama would have the upside of credit card rewards.

Now, the card I chose to use was the one that offered me the best rate. What I didn’t consider was the fact that this card had a lower limit than others I might have chosen. Why did this matter? Turns out the surgery bill was enough to increase my utilization rate by over 50%, and my credit score didn’t like that one bit.

The fundamentals of the use of credit.

Here, you may be wondering what a credit utilization ratio is. Essentially, your credit utilization ratio is the percentage of your available credit that you’re using on any given card (or all of your cards combined).

For example, if your credit card has a limit of $5,000 and you have a balance of $1,000, your credit utilization ratio is: $1,000 / $5,000 = 0.2 = 20%.

Why is this important? Your FICO® Credit Score is based on five different factors, including:

  • Payment history (35%)
  • Amounts due (30%)
  • Length of credit history (15%)
  • Credit mix (10%)
  • New credit (10%)

That second factor, amounts owed, is where their use comes into play. Rather than just looking at how much money you owe overall, your credit score actually takes into account how much available credit you’re using — your utilization ratio.

Using too much of your available credit is considered a red flag, as it could mean you’re spending more than you can afford. While you’ll have the most problems if your overall usage is high across all of your accounts, even having a single card with a high usage rate can hurt your credit score. (This is one of the reasons it’s a bad idea to max out a credit card.)

How it affected my credit score

In general, it is considered a good rule of thumb to keep the utilization rate below 30%, with the ideal rate being below 10%. Going over 50%, I triggered that little “Danger, danger!” robot from, well, every sci-fi movie in history.

The result? My credit score dropped a whopping 25 points.

While that seems like a big drop, it actually wasn’t as bad as it could have been. I had a couple of big factors going for me:

  1. Me general utilization was still very low. I have a good amount of available credit on several credit cards, and this was the only card with a high balance. If I had multiple credit cards with high utilization, my score would probably have dropped much lower.
  2. My credit score was over 800 before the crash. Even losing 25 points, my credit score was still firmly in the “very good” range. If my score had been lower, the drop might have been more shocking.
  3. I wasn’t applying for any new credit right away. Since I didn’t really need to apply for any new credit products, or take a credit check for anything else, the drop in my score didn’t really affect anything major.

Had any of these factors been different, the 25-point drop could have been significantly more painful.

how i recovered

Your credit score is a continuous number, which means it changes all the time, sometimes even daily. Part of that is because every lender sends your balance information to the credit bureaus. For example, most credit card issuers will send your most recent balance information to the credit bureaus once a month, usually at the end of your statement period.

This timing means that even if you pay your credit card in full before your bill is due, you could still have a high balance reported to the credit bureaus. However, you generally have a grace period between your statement closing date and your bill due date to pay your balance without being late or charged interest.

And this is what happened to me. The medical bill arrived on my credit card just before the statement period ended. So that’s the balance that was reported to the credit bureaus, and used to calculate my credit score during that time.

Because we had the money saved, I was able to pay off the credit card in full well in advance of the due date, avoiding interest fees altogether. And as soon as my credit card issuer sent my updated balance to the credit bureau (which was several weeks later), my credit score fully recovered.

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