Dear Liz: You’ve written that it’s generally better to have small balances on several credit cards than a big balance on one card. Would you please elaborate on this?
When it comes to revolving credit, it was my understanding that the credit score is looking at the total utilization for all revolving debt. For example, I have the following: a Visa card with a limit of $10,000 and a balance of $5,000, another Visa card with no balance and a $20,000 limit, and a furniture store card with a $2,000 balance and a $5,000 limit.
My total revolving credit available is $35,000 and my utilization is $7,000 or 20%. Before reading your article, I was considering transferring both balances to the high-limit card. My utilization would still be 20%, so why would it be better to leave the balances on the other cards?
Answer: The leading FICO credit scoring formula looks at both your overall credit utilization and the credit utilization on each card. That’s why the company that created the score, also known as FICO, advises that in general it’s better to have small balances spread across several cards than a big balance on one card.
In your case, however, shifting balances would probably leave you better off. Instead of credit utilizations of 50%, 0% and 40%, you’d have utilizations of 0%, 35%, and 0%.
There’s no hard and fast rule about how much of your available credit you should use on each account. The less you use, the better.
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