You May Be Getting the 30% Credit Utilization Rule Wrong - How it Works & How to Improve It

Money Mel Jr

4 Nov 202108:01

Summary

TLDRIn this video, the host breaks down the '30% rule' for credit card usage, emphasizing the importance of keeping total credit usage under 30% to maintain good credit standing. Through an example of 'Ballin Bob' and his multiple credit cards, the host explains how spreading out credit card usage can help avoid exceeding this limit. However, they dive deeper, explaining how high usage on individual cards (even below 30% total) can negatively impact credit. The host concludes with advice on managing credit usage more effectively, inviting questions from the audience.

Takeaways

💳 The 30% rule for credit card usage is important for maintaining good credit health.
🤔 Many people have only a basic understanding of the 30% rule, but it goes deeper than they realize.
📈 The 30% rule refers to using no more than 30% of your total available credit across all credit cards.
🧠 It's better to spread your credit usage across multiple cards to avoid hitting the 30% limit on any one card.
💼 Bob has three credit cards: Bank of America ($50,000 limit), Capital One ($45,000 limit), and Chase ($5,000 limit), giving him a total available credit of $100,000.
✅ Bob tries to stay under 30% usage across all his cards, but he also needs to be mindful of individual card usage.
📊 Bob uses only $5,000 on his Bank of America card (10%) and $10,000 on his Capital One card (22%), keeping him under 30% overall.
⚠️ However, Bob maxes out his Chase card (80% usage), which can negatively affect his credit score even though he's under 30% total usage.
🔍 Credit bureaus look at both total credit usage and individual card usage, so it's important to manage both.
🎯 Even though Bob is under the 30% total usage rule, his high individual card usage could prevent him from maximizing his credit score.

Q & A

What is the 30% rule when it comes to credit cards?
-The 30% rule refers to keeping your credit card usage below 30% of your total available credit. This helps maintain a good credit score, as going over 30% can make you appear as a liability to creditors.
Why does Bob have multiple credit cards?
-Bob has multiple credit cards to spread out his usage and avoid exceeding 30% on any single card, which would negatively affect his credit score.
How does Bob manage his Bank of America credit card?
-Bob has a $50,000 limit on his Bank of America credit card, but he only spends $5,000, which is 10% of his available credit on that card, keeping him well under the 30% rule.
Why does Bob use his Capital One card more frequently?
-Bob uses his Capital One card more often because it offers better rewards, such as gas and dining points. He has a $45,000 limit on this card, and he spends $10,000, keeping his usage at 22%, which is still below the 30% threshold.
What is the issue with Bob's Chase credit card?
-Bob's Chase card has a $5,000 limit, and he has spent $4,000, putting him at 80% usage on this card. Even though his total credit usage across all cards is below 30%, the high usage on this individual card could still negatively impact his credit score.
How do credit bureaus assess credit card usage?
-Credit bureaus like Experian, TransUnion, and Equifax look at both your total credit usage and individual card usage. Even if your overall usage is under 30%, high usage on a single card can hurt your credit score.
What would happen if Bob’s total usage went over 30%?
-If Bob’s total credit usage exceeded 30%, he would be seen as a higher liability by creditors, which could lower his credit score and make it harder for him to get approved for new credit.
How does Bob manage his total credit usage?
-Bob has $100,000 in total available credit across three cards. He keeps his total usage at $19,000, which is 19% of his total available credit, well under the 30% rule.
Why is it important to monitor individual card usage, not just total usage?
-Creditors and credit bureaus look at the usage of individual cards as well. High usage on a single card, even if your total usage is low, can negatively affect your credit score. For example, Bob's 80% usage on his Chase card is harmful despite his overall credit usage being below 30%.
What should Bob do to maximize his credit score potential?
-To maximize his credit score, Bob should try to reduce the high usage on his Chase card, bringing it below 30%. This would help him avoid negative impacts from individual card usage while maintaining his good total credit utilization.

Outlines

00:00

💳 Understanding the 30% Rule for Credit Card Usage

In this segment, the speaker introduces the '30% rule' regarding credit card usage. Most people have a limited understanding of this rule, which involves keeping credit usage under 30% of the available limit. The speaker plans to delve deeper into the topic, aiming to educate the audience on how to better manage credit usage. A humorous and relatable character named 'Bob' is introduced to demonstrate credit card management strategies.

05:02

🔢 Bob’s Credit Card Strategy

The speaker explains how Bob manages three credit cards from Bank of America, Capital One, and Chase, with a total credit limit of $100,000. Bob aims to stay within the 30% usage rule by distributing his expenses across the cards. For example, he uses only $5,000 on his $50,000 Bank of America card, and $10,000 on his $45,000 Capital One card for rewards points. Bob's total usage remains below 30%, ensuring he's seen as financially responsible.

🍾 Bob's 'Fun' Chase Card and Hidden Risks

Bob's Chase card is his 'fun' card with a lower limit of $5,000, used for entertainment expenses like sports events and bottle service. Even though Bob maxes out 80% of this card's limit, his overall credit usage stays under 30%, which he believes is enough to maintain good credit. However, the speaker warns that individual card usage over 30%, like Bob's Chase card, can still negatively impact his credit score despite overall low usage.

📊 The Importance of Managing Individual Card Usage

The speaker emphasizes that while Bob's total credit usage is below 30%, the 80% usage on his Chase card could lower his credit score. Credit bureaus, such as Experian, TransUnion, and Equifax, evaluate both total credit usage and individual card usage. Even though Bob could be eligible for higher credit scores, his high utilization on a single card prevents him from reaching his full potential. The lesson: it's crucial to keep individual credit card usage under 30% as well.

💡 Key Takeaways on Credit Card Management

The speaker wraps up by encouraging viewers to be mindful of both total and individual card usage. The '30% rule' is a helpful guideline, but understanding the deeper implications is essential for maximizing credit scores. The audience is invited to ask questions in the comments, and the speaker promises to respond and provide further insights. The video ends on a motivational note, reminding viewers to apply what they’ve learned for better financial health.

Mindmap

Keywords

💡30% Rule

The 30% rule refers to a guideline for credit card usage where individuals should not use more than 30% of their total credit limit to maintain a healthy credit score. In the video, this concept is central to the message, as the speaker explains how exceeding this threshold can negatively impact one’s creditworthiness, even if the total usage is under control. Bob, the example used, tries to stay within this rule to avoid being viewed as a liability by creditors.

💡Credit Card Usage

Credit card usage refers to how much of the available credit limit a person utilizes on their credit cards. The video emphasizes responsible credit card usage by managing individual card balances and total credit limits. Bob's strategy of using different cards to spread his expenses illustrates how to avoid going over the recommended percentage of usage on any single card.

💡Credit Bureaus

Credit bureaus like Experian, TransUnion, and Equifax are organizations that collect and maintain credit information. They evaluate credit card usage and assign credit scores based on how individuals manage their credit. The video highlights how these bureaus assess both total credit usage and individual card usage, impacting one’s credit score.

💡Liability

Liability in this context refers to how lenders perceive a borrower’s financial responsibility based on their credit usage. If a person exceeds the 30% usage rule, they are seen as a higher liability, potentially leading to denied credit or lower credit scores. The speaker explains that staying under 30% usage makes one appear responsible and lowers the risk of being labeled a liability.

💡Diversification

Diversification, in the video, refers to spreading credit card usage across multiple cards to avoid maxing out a single one. Bob uses this strategy by utilizing three different credit cards with varying limits, helping him maintain a lower usage percentage overall. This approach ensures he stays within the 30% rule, improving his credit health.

💡Credit Limit

A credit limit is the maximum amount of credit that a lender extends to a borrower on a credit card. The video uses Bob’s example of having a $50,000 credit limit on one card and smaller limits on others. Managing these limits by not exceeding 30% of any one card is a key strategy Bob uses to keep his credit score high.

💡Total Credit Usage

Total credit usage is the percentage of the total available credit across all cards that has been used. Bob's total credit usage is below 30%, but the video highlights that even if this figure is within a safe range, high usage on individual cards can still hurt his credit score. This term represents the balance between using credit and managing it responsibly.

💡Individual Card Usage

Individual card usage refers to the percentage of a credit limit used on a specific credit card. Even though Bob keeps his total usage under 30%, he has 80% usage on one card, which negatively impacts his credit score. The video stresses that managing each card separately is important for maintaining overall good credit health.

💡Credit Score

A credit score is a numerical representation of a person’s creditworthiness, based on their credit history and usage. The video explains how staying under 30% usage on both total and individual credit cards helps maintain or improve one’s credit score, which is important for obtaining loans, mortgages, and other financial opportunities.

💡Points and Rewards

Points and rewards are benefits that credit card holders can earn through purchases, often redeemable for travel, cashback, or other perks. In the video, Bob is depicted using his Capital One card for everyday purchases to maximize points, highlighting the additional advantages of using credit cards responsibly while managing usage rates.

Highlights

Introduction to the 30% rule for credit card usage and its importance.

Most people only have a general understanding of the 30% rule, but it goes deeper.

Bob, the example character, uses multiple credit cards to avoid exceeding the 30% usage on one card.

Bob has a total of $100,000 available credit across three credit cards.

Bob manages his credit by ensuring that no more than 30% of his total credit limit is used.

Bob strategically spends $5,000 on his Bank of America card (10% of its limit), staying within the 30% threshold.

Bob spends $10,000 on his Capital One card (22% of its limit), which is also below the 30% rule.

Bob uses his Chase card for leisure, spending $4,000, but this reaches 80% of its limit, which is a potential issue.

Even though Bob’s total usage is 19% (well below 30%), individual card usage still matters.

The 80% usage on Bob’s Chase card will negatively affect his credit score despite his overall low usage.

Credit bureaus (Experian, TransUnion, Equifax) consider both total credit usage and individual card usage.

Bob’s total credit usage being under 30% won’t fully protect him due to the high usage on the Chase card.

High usage on any single card can prevent Bob from maximizing his credit score, even if his total usage is low.

Bob could potentially miss out on 10-20 credit points because of his high usage on the Chase card.

Understanding both total and individual card usage is crucial for improving and maintaining a good credit score.