Why I Don’t Worry About Credit Card Utilization Spikes

by Kevin on May 27, 2012

Why do some people worry so much about their credit card utilization rates?

I certainly don’t, but I understand why some people do. It all comes down to how your credit score is calculated. If you are in the throes of credit card debt, your credit score and utilization can greatly impact the amount of interest you end up being charged over the long term.

That’s the beauty of being debt-free. When you don’t owe anyone anything on a revolving credit basis, you don’t have to worry about these things. Isn’t that a worthwhile goal?

My Credit Card Utilization Spikes

Up until recently I’ve been able to keep my credit card utilization below 50%. I have two major credit cards, both with pretty decent credit lines. I use my cards regularly throughout the month to earn cash back on my spending. I never pay interest on these charges because I pay off the balance every month. This also gives me extra cash “float” in my interest-earning accounts; my balance is higher throughout the month because the money stays in the account until I pay my credit card bill.

So why have I been using my credit card so much that I’m seeing significant spikes? In short, I’m loosening my frugal habits a bit. My wife and I have saved a lot of money up over a long period of time, and we’ve decided to start deploying some of it. This has been a struggle for me because I’m the money guy in our family and I don’t usually love spending money. My wife has had to encourage me to live a little — which is good for me.

We’ve recently redone our backyard, put in two retaining walls, and this weekend we’ve been working hard on turning the bonus room into a man cave. Those expenses start to add up: couch, recliner, TV, Blu-Ray player, surround sound system, and so on.

These aren’t budget breakers by themselves, but when you buy them all at once you see a big jump on the credit card bill. (One of our cards jumped up to 75% utilization at one point.)

Thankfully, we have no debt (aside from our mortgage) and we recently refinanced our house. We have no need for future financing because we’ll pay cash for our next vehicle and we are crossing our fingers we don’t have to move ever again. So even if our credit score dropped a few points because of the spike (and it didn’t go back up in a couple of months when our utilization went down), it wouldn’t really impact us at all.

Credit Utilization Matters When In Debt

However, if you are in debt then your credit utilization is pretty important. How so?

Your credit score is made up of five main categories:

  • Payment history (35%)
  • Debt level/credit utilization/how much you owe (30%)
  • Age of credit (15%)
  • Mix of credit (10%)
  • Credit inquiries(10%)

As you can see, utilization is the second largest driver of your credit score. If your utilization goes up significantly, that 30% section of your credit score calculation is impacted. That can drop and push you into a higher interest rate, disqualify you for a loan, and so on. It’s definitely a thing to avoid.

Even if you’re not at a place where you can ignore your credit score or credit utilization, it is nice to keep that as a goal in mind. Using credit because you want to is a lot nicer than being forced to use credit because you have to. Anytime you’re getting something when you have no other option, you probably aren’t getting the best end of the deal.

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