EPS 53 - Credit Utilization: The Silent Credit Score Killer

Credit utilization is one of the most important — and most misunderstood — parts of your credit score.

In this episode of the Pink Money Podcast, Jerry Williams breaks down how credit utilization works, why it accounts for 30% of your credit score, and how even responsible borrowers can accidentally damage their credit rating.

Using a real-life experience while helping manage his mother’s finances, Jerry explains how credit card balances can quietly exceed limits and negatively affect credit scores. He also shares practical strategies for keeping utilization low and protecting your financial reputation.

Understanding how credit utilization works can help you maintain a stronger credit score and qualify for better interest rates when you need them most.

💬 Have a question or comment? Contact Jerry here

Transcript

SPEAKER_00 0:00

The following podcast is for educational and entertainment purposes only. Remember to seek competent tax, legal and investment advice that is unique to your personal situation. Hey everybody. Welcome to the Pink Money Podcast. I'm your host, Jerry Williams, and we talk about all things related to money from a gay perspective. And today I want to talk about credit utilization. And what I mean by that is how it actually is a part of your credit score and really how it can affect you. And what I mean by that is, you know, recently I encountered a situation where it became very clear to me that a lot of people don't really understand credit utilization. And I think it gets overlooked, and it is something I think that people don't pay too close attention to, but it is really significant and it can be one of those things that you can manage well, or it can sort of run amok. And I'll explain here in a second. But let's go over just kind of the basics of what a credit score is, right? I think we've all heard it, we already know a lot of the basics, but let's just recap kind of how credit score is calculated and what the components are. So you have 35% of your score based on your payment history, meaning do you pay your bills on time every time? That's pretty much it. Did you make your payment? Yes or no? Black and white. Then the next biggest chunk, 30%, is the credit utilization. That just means how much of your credit is available to you. And I'll go into a little bit more detail here in a second. Then 15% relates to the length of time you've had credit with your lenders. So the longer you've had a credit line of credit open with somebody, then that just reflects better than you know brand new credit. Then you go into 10% is your credit mix, meaning the different types of credit. So it reflects better on you if you can manage different types of credit, like a credit card, a car loan, a mortgage, personal loan, those kind of things. And then the remaining 10%, it goes into what are called hard inquiries onto your credit report. So if you're looking to buy a car and you fill out a credit application and your bank pulls your credit report, that's going to be a hard hit onto your report. There's also soft hits, so you see a lot of those. You only want to apply for credit when you really want it, and you don't want to keep applying for a whole bunch of cards, etc., especially if you're not going to get approved, then that's just going to be a bad look on you. So what really happened was, you know, my mother has dementia. She's 86, and it's just one of those things that happens when you get old, right? But if you're the kind of person who helps other people and you don't mind, you know, taking over financial situation for somebody, then this is just one of those duties that you find yourself in. There's, you know, people who are highly organized and detailed, and they don't mind doing it, and there's the opposite. And I'm just one of those people that it doesn't bother me. You know, I've done it forever, and I find it actually kind of relaxing, and I also find it gratifying when I'm able to go and straighten out someone's situation because it just is one of those traits that I have that I like to be organized and neat, and I just find that I prefer to stay on top of things instead of letting them go. And I think that no matter how you feel about your own personal finances, whether they're in good shape or not, whenever you step into somebody else's shoes, then it's always eye-opening because they just are a unique individual, right? And they do things differently than you do. And I'm not criticizing how people go about their business. That is just what it is. It's their business. But again, when you have your own way of doing things and you look at other people, then sometimes you can see room for improvement, and that's kind of the basis of a lot of financial advice, right? Because when an advisor looks at your entire situation, which you know hopefully they do do, and they ask you a bunch of questions, and then they start to see some gaps or poke holes in it, and then that's sort of the basis of their advice, and you know, it can go from there. But so anyway, um, a half power of attorney, like I said, over my mom's accounts. One of the things that I noticed was one of her credit cards just wasn't going down as quickly as I thought it was going to go down, and I wasn't really paying too close attention to the reasons why. And I thought, well, maybe it's the interest rate, and I checked, I'm like, no, it's not really that. And then I started taking a look and I realized that her balance was way over her credit limit. And not by a little bit, not by like, you know,$10,$20,$100. No, we're talking about over a thousand dollars. And that surprised me, right? Because then the more that you're paying on a credit card, then the higher the interest is going to be. So your payments have to adjust, in my mind, so that you can wipe out this credit card debt sooner rather than later because the interest you're paying on this balance is is high. It's just money that you're throwing out the window. It's money that you might as well just set on fire because there's no benefit to you in this sense. It doesn't go into your savings, it doesn't go into your investments. So those make your money grow. This does really nothing for you. All you're doing is paying the bank or this, you know, institution, whatever it is, to charge you money for things that you've bought. And I guess that some ways, you know, we do it because we feel like we don't have any other choice. Let's say if you want to buy a house and you don't have three, four hundred thousand dollars to put down on the house and buy it outright, you usually take out a mortgage, and then you just pay the interest as you go, and you just go, I gotta suck it up, right? It's just part of the beast. If I want to own a house and I don't have the money, then I'm gonna have to take out a loan, and then interest is just a big part of it, and you suffer through it unless you get mortgage that you can pay off rather quickly, like instead of a 30-year mortgage, you go with a 15-year mortgage, you know, or you make very concerted efforts to pay off your 30-year mortgage as quickly as possible by making extra payments. You get the idea. So, nevertheless, the credit card, like I said, was over its limit to a significant degree. And I called the bank and I spoke to the frontline employee. And like I said, because I have power of attorney, you know, I'm acting in my mother's stead. I have her permission, her authorization to handle things on her behalf. And it's very, very necessary in my mind, again, to lay out a lot of financial planning and estate planning documents ahead of time so that when this situation happens, you're not a caught off guard. You're able to take control of things when it's necessary for you to take control of things so that you can smooth out the path and alleviate these obstacles for this person. And that's just prudent planning, period. Nevertheless, let's go back to credit utilization. So I'm calling, I'm asking, hey, why is this credit card over its thousand dollar limit? And the frontline employee employee doesn't have an explanation for me, and she refers me to the terms and conditions, and I'm asking, why would I go to the terms and conditions? What's in there? You know, what how's this gonna explain this situation here? Well pa she had no idea what she was even talking about. So her, who knows, coach, her coworker, whomever, her training, I don't know, sent her to the terms and conditions and said, tell him to read this and let's hurry up and get him off the phone and get to the next call. But that's not gonna work with me, right? Because I know that the terms and conditions aren't gonna answer my question. I already know how this happened in terms of the mechanics of it. I want to know why it happened. Because when there's a credit limit, right, that is the top. And that usually means you cannot charge over and above this. I mean, otherwise, why have a credit limit, right? Then you might as well just say, charge as much as you want, it doesn't matter. I mean, if you have an American uh express black, you know, then you can do essentially whatever you want. This is not that. So I didn't understand why the bank let this go over to such a significant degree, and I wanted an explanation. She had none, and I'm completely okay with you saying I don't know. Because that's real. I don't know means I've reached the limit of what I know. So she turned me over to somebody else. Perfect. That's exactly what I want. Put somebody else on the phone who knows and can answer my question. The next person comes on, guess what she does? Refers me to the terms and conditions. And again, why? Why would I look at that? What is that gonna tell me? How does this answer my question? Well, yeah, I'm like, why would she put me through to you if you're the escalation person? I don't even know if you're a part of the management team, but you should be able to answer this question. Okay? It's pretty simple. The reason this happened is because when you charge things up on your credit card, you get what's basically a pre-authorization. So if there's credit that is available at the time that the merchant is trying to put the charge through, then it's getting the authorization saying that yes, this amount of credit is available. So it doesn't mean that this is settled, it just means at the time that this inquiry was made, there was that amount of credit that was available, and that's it. That that's all it is, right? It doesn't mean you've made the purchase, it just means that they've put that inquiry in and got a pre-authorization, and then things settle, and so multiple transactions can come through and then they settle. That may put you over your credit limit. Even the terms and conditions will say, yes, we allow certain transactions to come through based on however they make that judgment call, right? Which is again fine. That's not what I'm asking, because I understand how that works. I'm saying, why did you let it go through to this degree? So it wasn't like the bank just said, Oh, you've been such good customers, we don't really care. Just go ahead and let it go through. No, that doesn't happen. If I were to go today and I would have used that credit card, guess what I'm gonna get? Declined. Because there's a credit limit. That means you've reached the limit, you're over the limit. And even in as much as that is bothersome to me, I could even live with that, that you've let this slide and go over to this degree, right? I don't like it because it costs money, and I would have a better solution if I had known that these transactions weren't going to go through. Yes, I would have made different arrangements because I don't want this credit card to go over its limit. And the reason why is the credit utilization. That reflects negatively on your credit report. It hurts your credit score. So, like I said, when we go back to how the credit score is calculated, we have the 35% of you paying your bills on time every time, every month. We have the 30% of the credit utilization, how much of your credit have you used? We have the 15% goes for the length of time you've had credit, the 10% go into credit mix, and the remaining 10% going into hard inquiries. So, in terms of the 30%, we are far and away above the total amount that is available. So again, this is going to hurt your credit score. So if I have a$10,000 credit limit and I've charged up$5,000, that is half of what is available. Now, ideally, in your utilization, you'd have 30%, which is considered okay. You would have 20%, that would be considered better. 10%, yes, that's where you want to reside at the 10% level. Even if it's a card that you have never used or you used rarely, you want to use it occasionally just so that you keep this active, and then the utilization rate is calculated based on again, you making these purchases, but under this 10% level. It just says that I use my money responsibly, I know how to use it, and I'm not going to overextend myself. I'm not going to get to the point that these mathematical algorithms take a look at me and say, this is kind of worrisome. I don't know why he's so, you know, overextended. He's used up all of his credit. That's not a good thing. He might default. There's a level of risk here. Hmm. We're going to take that into account, and what we're going to do is lower your credit score as a result. It's just telling the lender, this is maybe someone you need to keep an eye on. I don't want that to happen, right? I want the reverse. I want there to be no question that this person is worthy of the credit we're going to lend to them because we don't have a problem with the idea that this person's going to skip, that they're going to be a problem, that they can't pay their bills. That's where I want to be. So when this person tells me they don't know, that's worrisome to me because you work in this industry. You are representing this bank who extended this line of credit. Explain to me how this went from a hundred percent to over a hundred percent, and not a little bit, but by a lot. So when you can't tell me that, of course, it's gonna be bothersome to me because I'm a detailed person. I like to get the answers that I'm looking for, and I don't want to be put off because you don't know. What should you do? Fess up. You know, I don't know. I don't know. Perfect. I understand you don't know. Then you should tell me, let me go find somebody else. Yes, that's what you should do. Find somebody else. If you don't have anybody that's available right then and there, then what do you do? You know what? Let me go and research this for you. I've got your contact information, and when I have an answer, I will call you back. Perfect. That's great. That's what I want. Because I want the answer to my question. I don't want you to guess. But in this instance with this rep, just to kind of close the loop on this story. So again, knowing she didn't know what she was talking about and trying to pacify me and put me off, or try to talk condescendingly to me, which again does not work, because I understand how things work financially. I'm nobody's dummy. I wouldn't be doing what I've do what I'm doing. I wouldn't have been a financial advisor for 20-some years. I don't know why I would have bothered pursuing a master's degree in personal financial planning if I didn't know what I was doing. That just doesn't work like that, right? You pursued higher education for a reason and a purpose because you need it, you want it, and you're going to put it to good use. Nevertheless, that would have been really condescending for me to say and very patronizing, but I didn't. I didn't go there. Wanted to, right? We all have crazy thoughts, but no, I didn't want to get into that kind of an argument because it has nothing to do with again the basis of my question. Anyway, she did not say that. And so what I told her is this is the reason I'm calling because I want to answer to my question. And she says, Well, I think you should call Visa. Visa? And why would I call Visa? Well, because no, there would be no reason for me to call Visa, right? The only thing I would do when I call Visa is ask, how is business? Because Visa does not care about this situation. They're gonna tell me, go back to the issuer of the card, go back to your bank and ask them the question, right? This is one of their rules. This has nothing to do with Visa. And then on top of that, she says, Well, maybe it's a merchant. Well, first of all, you shouldn't be telling me about maybe. You should tell me this is the reason why. I don't want you to guess, I want you to know the reason why. And again, why why would I call the merchant? What what what what are they gonna tell me? Because we're talking about probably multiple merchants, right? There probably isn't just one purchase that pushed this over the level. I'm not even disputing the charges, I am saying why did this go over its limit? So all these merchants, do you think that they care that I'm over the limit? No, they don't care at all. Because they're saying we sold you this, you put it on your credit card. At the time we ran your credit card, it was allowed and went through on the bank side. So we got our money, you got your product, merchandise, whatever, we're all happy. So there's nothing else for me to talk to the merchant about. So unless I decide to make a return, anyway, so you can see how this conversation went nowhere and went south. So anyway, I ended up writing a letter to the bank and complaining about this whole situation, and she wrote to me back, this resolution person. You know what she put in her letter? Refer to the terms and conditions. Oh, okay. That didn't work, and this conversation has just ended because there's no explanation here. Really, there's none. The only explanation is, again, like I mentioned, that at the time these transactions were authorized, there was credit, and then they settled, and then it pushed it over the limit. There is no explanation to why it went over to this degree. None. Because again, there should be a credit limit that does not allow you to go over this level. And to make this even more kind of ironic, is after I paid this down, I get a letter from the bank saying, hey, by the way, you're over your credit limit. Oh my god. It just never ends. Anyway, the whole concept here, like I said, is utilization, you have to keep an eye on it. And as I mentioned before, had I known, of course, you know, I didn't know what was happening here in this instance, or I would have helped my mother make a better decision because I wouldn't have wanted her to push her utilization rate up so high. Because what I could have done is put this on other cards. So if I had a card that, let's say, had nothing on it, then I would have moved some of these purchases to that card. If this one was crusting past 50%, then I would have put it on another card to make sure that we were at that 30% level if that was possible. I could have taken out, let's say, a personal loan if it was for a very, very large purchase, whatever. Maybe there was some, I don't know, remodeling being done or a huge landscaping project being done. I would have made other arrangements to make sure that this did not impact your credit score. So when you're aware of these things, you can make better decisions. This is not manipulating your credit score. This is working strategically with your credit score because you may need your credit score to remain high. Maybe it's just out of personal satisfaction. Maybe you like having a credit score in the 700s, 800s. That's nice, right? Maybe that's helpful to you because the higher your credit score is, then when you do take out credit, then you get a pretty good interest rate. When you have terrible credit, you pay the price. You pay interest that's very high, sometimes up to 29%. I don't even know how high credit card rates can go, quite frankly, but it doesn't matter. If you're paying for For whatever you bought at Macy's and you are paying on a at a twenty nine percent interest rate, well that's no bargain, right? That's no bargain at all. That's very harmful to you. Cause again, that money's not working for you, it's working against you. And you only have so much money, and the last thing you want to do is give it away. And the last thing you want to do is especially give it to a merchant who doesn't care about you at all. I mean, if you're gonna give money away, give it to me. Give it to, you know, a charity, give it to the Humane Society, whatever. And even when you do a donation like that, you're gonna get the ability to take that off on your taxes. So there's sort of the win-win. There's the encouragement there to donate because the government says, yeah, we're gonna support you in your charitable donations by saying this is a good thing and you're helpful to society, and we're gonna reward you for that, at least to a certain degree. We'll allow you to take, you know, a tax deduction. Anyway, you get the point. So I'm just saying that credit utilization, I think, is a bigger part of your credit score, quite frankly, than even your payment history. Again, that's black and white, but your credit utilization rate is not. It is a little squishy, but you can use it to your benefit, or you can let it run amok and it will work to your detriment. So I think I've said enough about that, and I just wanted to say that I think that this is a good lesson for anyone. And I don't blame the frontline employees, let me tell you that. Because they only know as much as they know, they're only trained to a certain degree, and it's not like, you know, I'm talking to a CPA, and if you're going to these institutions looking for financial advice and you're speaking to the frontline employee, that's probably not really going to work, right? Why are you talking to them? If you're really looking for advice and guidance, you need to seek out competent advice and guidance for somebody who really knows what they're talking about. That would be my best suggestion. And there's lots and lots of resources out there, and as I've said multiple times, I mean, you should have a good financial advisor in your pocket so you can ask him or her such or you know, questions that you have. Now, it doesn't mean, again, that your financial advisor is a guru, that they know everything under the sun. That that's not generally the case. I can tell you there's many, many, many, many good financial advisors out there, but they may not know a thing about property and casualty insurance. It's just not a part of their world. Many financial advisors they operate out of the silo of investments. That's pretty much their lane that they're in. They can guide you and give you advice and kinds to about investments till the cows come home. But broader topics, maybe like life insurance, they may have a basic working knowledge of it, but maybe their experience just isn't that broad. So, you know, not to throw anybody under the bus, but I know there's a well-known TV financial advisor who rails or used to rail anyway, I haven't watched in a long time, about annuities. And I could tell that this person didn't know a thing that they were talking about regarding annuities because like most financial products, they have a place and a purpose. And it doesn't mean they're for everyone, but if it falls into your world because it resolves this problem that you want to address or a goal you're trying to achieve, then it's suitable. And you may not know that on your own. You may need may need to talk with a professional who can guide you and explain why this is gonna work for you. Anyway, enough about all that. I think I've talked about that before, anyway. It doesn't matter. I want you to be educated, I want you to be empowered and enlightened about as many financial topics as I can impart to you because I think it's just helpful. The more you know, the better you're gonna be. Anyway, I will talk to you next time.