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Credit Scoring Explained – Part 2 of 5

By now, you have learned that your payment history is the biggest part of your credit and that it makes up 35% of your score. This next factor makes up 30% of your score so it is almost as important as payment history.

It is credit usage and it is the percentage of your available credit that you are using. This only applies to credit cards or what your credit report refers to as revolving credit, meaning that you can use it, pay it down and use it again. This isn’t something you can do on a car loan or a mortgage.

An ideal situation is that you use no more than 30% of the available credit on your cards. But just because you go to 31% does not mean your score will suddenly drop, it will only be slightly lower than if you were using 29% of your available credit.

If you want your score to be at its best, your usage would need to be under 10% but, believe it or not, it should be above zero. In other words, your score will be higher if you use some credit than if you don’t use any at all.

Other important thresholds on credit usage are 50%, 75% and 100%. When your usage goes over each one of these, your score will drop, especially if you go over 100% which means you are over your limit.

When you consider that 30% of your score is based on the percentage of credit you are using, it becomes important to have more credit than you actually need. The question becomes, how much credit do you need? And the answer is calculated by first figuring out how much you are going to use.

If you expect that you are going to use $5,000 on credit cards, you should have about $20,000 in available credit. This would keep your credit usage at 25% which puts you under the first threshold of 30% usage. To the credit bureaus, this means you “use credit responsibly”.

It may not be possible to have enough credit to keep your usage under 10% or even under 30%. If this is the case, do what you can do keep it under 50%.

For more information about credit, you can find my book, Crack The Credit Code, To Play The Game, You Need To Know The Rules which is available on Amazon. Or, go to my website, CrackMyCredit.com.

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