Max Out Your Credit Knowledge

I'm always trying to crack the credit-scoring code that plays a big role in determining how much consumers pay for the money they borrow.

So I was eager to dig up an answer to a question I received from a reader recently. She wrote: "In your column, I have read that if you use over a certain percentage of the credit on your credit cards, it will lower your FICO score. My question is this: Is it a certain percentage of your credit-card credit overall or a percentage of your credit on a particular card?"

The credit-scoring algorithm looks at the credit utilization rate for each active account and, separately, a person's credit usage for several accounts together, said Craig Watts, public affairs manager for Fair Isaac Corp., the company that created the FICO credit score used by many lenders to evaluate consumer credit risk.

According to Watts, here is what's factored into your credit score:

· Your credit utilization for each active revolving account, such as credit cards and some home equity lines of credit.

· Credit utilization across all active revolving accounts.

· Credit utilization for each active installment account you have, such as a mortgage, auto or student loan.

· Credit utilization across all active installment accounts.

"We have found that both factors -- individual credit utilization and aggregate credit utilization -- have value in predicting future credit risk," Watts said.

Here's a practical example of what Watts is saying: Let's say you have four active credit cards, each with a credit limit of $5,000. Three of the cards have zero balances. The fourth card has a balance due of $5,000, making you maxed out (100 percent credit utilization). Being maxed out on that card will hurt your credit score.

However, your overall utilization for all four cards is just 25 percent, which is good and would probably help your score. An even lower utilization rate would help your score even more. Generally, you don't want to use more than 50 percent of the available balance on any one card, and you don't want the combined utilization to be more than 50 percent.

In addition, Watts said, the FICO scoring model gives more weight to your credit usage on revolving accounts than on installment accounts.