October 20th, 2010

Beyond The Basics: 4 Tricky Rules of Credit to Master

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credit basics

**Welcome to What To Know Wednesdays here at Credit Karma Bootcamp: Your 31-Day Credit Health Plan.**

The tenants of using and building good credit is second-nature to many consumers—pay on-time and don’t max out your credit card. But the more mysterious practices of credit card underwriting and credit reporting leaves some gray areas. For example, how much credit should you use and how do you score perfect credit? Typical credit score advice doesn’t reveals much about this.

There are some unexpected facts many consumers don’t know about credit use. If you want to master your personal path to a better credit score, you need to know these 4 tricky rules of credit:

  1. Using more credit could be a good thing…

    You never want to max out your credit card, but you also must use credit in order to build credit. Your credit card utilization rate is defined as your total credit balances divided by your total credit card limits, which at a glance, shows how you manage credit. For example, if you are using 90% of your total credit card limit, you may be seen as desperate for credit and a risky borrower.

    Generally speaking, the lower the credit utilization rate, the better the credit score; experts recommend keeping credit utilization rate under 30%. That, however, does not mean you should be carrying over a certain amount on your credit card balance to benefit your credit score. Credit card utilization is calculated at any point in time, not at the end of your credit card billing cycle. So keep your utilization at under 30% throughout the month, but still pay off your credit card in full.

  2. …And not using credit is a bad thing.

    People with 0% credit utilization have credit scores as poor as consumers who are considered risky borrowers. To illustrate this point, the graph below shows a sampling of 70,000 Credit Karma users, their credit scores, and corresponding credit card utilization rates:

    ccu graph

    Why would 0% credit utilization hurt your credit score? A number of situations could be happening: consumers with 0% credit utilization may not have a credit card due to poor credit, or they simply don’t use their credit cards. Either way, a 0% credit utilization rate is not useful for building credit. Using credit allows you to establish a positive payment history and active credit profile, and shows lenders that you have access to credit and know how to manage it well.

  3. The higher your score, the harder it is to improve and the harder you fall.

    Credit score models are closely-guarded algorithms, and it’s only recently that FICO disclosed how certain negative actions affect your credit score. Check out our post, Score Points On Your Credit Score in 5 Minutes.

    Noticed a peculiar pattern? Credit score algorithms are calculated so that higher credit scores are harder to raise; also, the higher your credit score, the more damage a negative action will have. In this post’s example, while a bankruptcy can cost a fair credit consumer with a 680 credit score as much as 150 points, an excellent credit consumer with a 780 credit score will suffer a 240 point drop.

    The jump from 650 to 700 is relatively easier to do than the jump from 800 to 850 because at the excellent credit range, it’s a matter of years and years of consistent, long-term good-credit behavior to climb the ranks to perfect credit. People with excellent credit in the 780+ range may barely see a change in their credit score despite all the right credit score moves, while it could take just a few months of good credit habits for poor credit consumers to build credit quickly. To see how certain actions could affect your credit health, check out our Credit Simulator.

  4. Don’t waste your time and energy on perfect credit.

    Of course, you should work hard on achieving great credit—but don’t kill yourself to get to 850. The truth is, the difference between a 780 and an 850 is negligible since lenders offer the best rates to anyone within that excellent credit score range. Plus, as mentioned earlier, credit scores’ algorithmic scoring model makes it harder and harder for high credit scores to climb higher. So shoot for the moon and land in the high 700s and low 800s so you can enjoy all the perks excellent credit has to offer.

CK Bootcamp Tip: Don’t stop at knowing the basics to credit. The rules change all the time and credit score algorithms can be tricky, so stay on top of them by checking your credit score often and always staying up-to-date on personal finance (with resources like this blog!).



Credit Karma Bootcamp: Your 31-Day Credit Health Plan

Throughout October, Credit Karma Bootcamp gives you daily information on what you need to make wise, credit-savvy decisions when it comes to credit cards, mortgages, insurance, loans, and most importantly, ALL THINGS CREDIT.

Follow along to get financially fit and credit healthy.


Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.


  1. “The tenants of using and building good credit”

    That’s *tenets* …

    libertarian at 7:33 am on February 26, 2011

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