Credit score Myth 4 and the United States government #myth4
30 percent, the alleged utilization ratio magic number, gets scrutiny thanks to Consumer Reports and the CFPB (aka BCFP)
| By Greg Fisher
Here's another example of Myth 4: The idea that 30% is in some way significant on the continuum of the so-called "credit utilization ratio."
The #1 result in a Google News search for the two words credit score is a web page titled "3 Ways You Could Be Hurting Your Credit Score Even If You Pay Your Bills On Time – Consumerist." #1503b
It is published by Consumer Reports subsidiary Consumerist ("Our colleagues down the hall at Consumer Reports" is how a Consumerist item from December describes the situation). The by-line is Chris Morran; Morran is Consumerist Deputy Editor (transcending language, Consumerist used to be the Consumerist, but the memo has not made its way to some quarters of the virtual empire (like in the Facebook, for instance)).
That's right: That Consumer Reports-- as in "Consumer Reports" the magazine that rates everything from door locks to SUVs.
And reports on credit scores.
Morran riffs on an article from credit.com and proceeds to list "some mistakes that consumers don't even realize they're making" that might lower a FICO credit score.
One way that you could be "wrecking your credit," according to the credit.com writer Rob Berger (and now amplified by Morran), is screwing up your credit utilization ratio-- balances compared to limits expressed as a percentage of credit lines used.
credit.com states, "If that ratio exceeds 30%, it can have a negative impact on your credit score."
Consumerist states, "If that ratio goes higher than 30%, it's negatively impacting your score."
|Impact is a big word these days here in Creditland. You can almost feel the "impact"-- like a hammer! Things don't just affect a score, they impact it. "Ka-boom."
The bigger issue, of course-- one article pointlessly reporting on another article-- is important, too, but for another day.
The notion of 30% as some kind of line between good and bad credit-use habits is a myth. It is Myth 4, to give it a name, and is just that: A myth-- pure urban legend.
According to Fair Isaac (the FICO score company), the best ratio is the lowest one. They said that a long time ago.
Barry Paperno, formerly with Fair Isaac, did a whole thing on it a few months back. The title of his piece: "Forget the 30 percent credit utilization 'rule' – it's a myth." Subtitle: "Your score won't fall off a cliff at 31 percent or soar at 29."
Want more gratuitous name-dropping? OK. His creditcards.com colleague Erica Sandberg is on board, too. She says, "The truth is that the lower your utilization, the better."
Yay truth. Boo falsity.
More truth proof? See creditscoring.com/myths, and #Myth4 on Twitter.
There is one more thing, though, and it's a whopper. Here is some information from an agency of the United States government. It is from the "Bureau of Consumer Financial Protection" or the "Consumer Financial Protection Bureau" (depending on the day of the week).
Credit scoring models penalize you for using too much of the credit you have available to you. This means your credit score may drop if you use more than 30% of the revolving credit you have available to you.
Author unknown. However, Fair Isaac is mentioned as some kind of authority on the subject of credit scores. #GetsTheLink You know you have arrived when you're a footnote (albeit a dead link). #HelloConnecticut
An item on equifax.com ($EFX) states: "In general, lenders like to see borrowers with debt-to-credit ratios at or below 30 percent for optimum borrowing potential. Anything lower is very good. Anything higher could mean that you may not be approved for credit or that credit could cost you more in the form of a higher interest rate." #1502gg
That is a different statement from the other one about 30 percent (what lenders want #2experts vs. what drops a score). But it was written by a person who now works for the CFPB (BCFP).
From: Greg Fisher [mailto:firstname.lastname@example.org]
Sent: Thursday, February 19, 2015 4:17 PM
To: Vahey, Moira (CFPB); Gilford, Samuel (CFPB)
Subject: credit score
Call me, please.
Truth and Falsity
The Credit Scoring Site
PO Box 342
Dayton, Ohio 45409-0342
The federal government replied!
[Update: Consumerist correction]
Who changed the name of our Consumer Financial Protection Bureau?