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

Summary

In 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.