Best Tips to Keep Your Credit Utilization Low to Improve Credit Scores


Customers often say to us, “I pay my credit cards off every month.” But when we pull their credit report, we’ll see large balances reported on their credit report and their scores will be lower than they thought. Here we discuss why that happens and the trick to avoid the bureaus reporting a high balance on your credit cards.


*The following transcript has been edited for clarity.

Eddie Knoell — I’m Eddie Knoell.

Tom Knoell — And I’m Tom Knoell.

 Eddie — Welcome everyone. This is our podcast right here from Phoenix, Arizona, and today we’re going to be talking about credit. We’re going to keep on bringing to you great pieces information.

Tom — Yeah, because we talk to these borrowers every day and it just always hits a smack in the forehead how important it is to talk about the most important and easy things for our borrowers to do to improve themselves when it comes to getting mortgages. And credit’s a huge one.

Eddie — Credit matters not just in mortgages, right, but your insurance quotes. Well, just anything insurance related. Homeowners, life insurance, car loans…

Tom — Getting a job even, right?

Eddie — Getting a job, you’re right. In the lending business, we pull credit reports. By law, loan officers, for example, have a credit report pulled.

Tom — I think you and I ought to come up with like a side business. I don’t know what it would be called, but it would be dad’s pulling credit for their daughters’ boyfriends.

Eddie — Right. Boyfriend Credit.

Tom — Just a boyfriend credit. Nice to meet you young man. What’s your credit score?

Eddie — Yeah. I need to know your social and date of birth.

Tom — If you have a 700 you can stay out ‘til 11 o’clock if you’ve got an 800 credit score, you can stay out until midnight.

Eddie — Yeah. You know if you can’t do a lie detector, you might as well do this credit report.

Tom — I’m telling you. There’s something there.

Eddie — Not a bad idea.

Tom — Okay. All right, so we’re going to talk about credit. We’re going to talk about the most important part from a consumer standpoint in terms of what’s easiest. So important can be a little bit of a different word or a confusing word, but when we talk about important, this is the biggest impact. Easiest one that you as a borrower control.

Eddie — Okay, so what Tom’s talking about is that we’re going to put up a pie chart. Okay? This is the different pieces of the pies, right? The pie chart. And each piece makes up, has a certain influence over your score. So there are five pieces that really makeup or influence the score. Today one of those pieces, and Tom’s talking about the most important piece.

Tom — Right. And I think maybe we just focus in on what that piece is and it is, what are we calling it? It’s just calling the amount owed. It’s also known as the utilization rate.

Eddie — Yeah, or that. Well, I’m just going to quickly go with the pieces of the pie are this. The amount owed or the utilization is 30%. 30% is the length of credit history. 10% is new credit. 10% is credit type. And 35% is the payment history.

Tom — Nice. Okay. So that makes up 100% of the pie. We’re talking 30% of it, which is this utilization, what we’re calling amount owed, okay.

Eddie — Amount owed.

Tom — Biggest thing. So if you have pencils, actually you don’t even need pencils. This is, this is so simple. So you wanted to just explain what we’re talking about here?

Eddie — Okay. If it’s about the percentage of… okay, take your credit cards, right. If you have a credit card, just to make for easy math, the credit card has a thousand dollar line of credit. Okay. You can take up to a thousand dollars. If your utilization, the amount you owe is $300 on a credit report, that’s 30% utilization. Okay. So the best scores come when the balances are below 10% in fact, really below 1% would be ideal.

Tom — Right? I think, yeah, believe it or not, zero is not the optimal, but they say one 1%.

Eddie — Yeah.

Tom — So try and get it to 1%. Probably very, very difficult. So Ed, what you and I always talk about is getting in that 1% to 10% range.

Eddie — Yeah. And so people who are watching this, I mean a lot of you who are calling us are these borrowers. They’re proud of their score. Or they’re proud of that. “Oh, I don’t have any credit. I don’t have any debt.” I pay off all my credit cards every month. All of them.”

Tom — You know, what? Can we just take myself as an example? Hey, I have pretty decent credit. I have a couple credit cards. I pay them on time, but my utilization is not very good because I’ve got a big family. We have lots of expenses.

So on a $5,000 credit line, and if I have, you know, $4,000 of it used every month going to Costco, you know, that’s an 80% utilization rate. So I probably have an 80% utilization rate all the time, which is not good.

Eddie — So this is the trick people. Like this is the piece of the pie that you can control on a month to month basis. Those other pieces of the pie we’re going to have videos and podcasts about as well. But this is the one that you control the most month to month.

Tom — Okay, so how do they do it?

Eddie — Okay, so Tom, let’s take your scenario, you brought it up. I mean if you have a $5,000 line of credit and you usually hold a $4,000 balance, by the time the credit cycle is done.

Tom — Right? So I’ll just tell you, I have a credit card. It starts on the first of the month and it literally ends at the end of the month. Some credit cards are not, you know, first day to last day. Some are mid month to mid month. It all depends, but mine happens to be first day of the month and it ends on the last day of the month.

Eddie — Okay. So I basically created this example. I’m going to put this image on the YouTube video.

Tom — Okay. All right.

Eddie — Let’s just pretend your cycle is what this cycle looks like. The cycle begins around the 12th of every month and ends around the 12th of the following month.

Tom — So what that means is, is when I get a credit card and I paid up to the month before and I go to Starbucks on the 12th of the month, that Starbucks purchase will be the first item showing up on my credit card statement. That’s when the credit card starts all over again.

Eddie — Yeah.

Tom — So literally on the 12th my Starbucks charge for $5.40 will show up as my first charge for that month.

Eddie — Yeah. This was actually… This image here is from a Capital One credit card. The cycle started in November 12th, 2019 and ended December 11th okay. So every month it’s going to be just like that. It’ll be about the 11th or 12th is when it’ll begin and end. So what Tom is talking about is exactly that. Like November 12th you bought coffee, it shows up, it’s the first thing that you bought.

Tom — That’s right.

Eddie — Okay. And by December 11th you have $4,000 racked up on the credit card.

Tom — That’s right.

Eddie — So here’s what happens. Everyone, the credit bureaus… or Capital One, all your creditors, all your credit cards are reporting those balances on December 11th in this example.

Tom — Yeah, they actually take a picture of it. Not literally, but figuratively. They take a picture of it and send that to the bureau. So at the end of every cycle they’re taking a picture of what your balance is, and they send it off to the bureaus.

Eddie — Yeah, that’s right. So you’re looking at your statement, look at those dates. The beginning and end, the ending date. And I know Tom and I, we constantly have to remind ourselves too. I mean it’s the ending date. That’s when the bureaus get the information.

Tom — Right.

Eddie — That’s when they get your balance.

Tom — Okay. So come the 11th, my $4,000 is very typical. Now when it comes to my due date, my due date is typically two to three weeks out. So call it like somewhere near Christmas, my actual payment would be due.

Eddie — Right.

Tom — And that’s what I usually do. I usually wait a day before it’s due. I go online, I make a payment.

Eddie — Yep.

Tom — And I do that every month. I’ve never been late. You know, God willing.

Eddie — Yeah.

Tom — And won’t in the future. But anyway, okay.

Eddie — 99% of people do the exact same thing. My due date’s whenever that comes, that’s when I’m making the payment. Right? 99% of the people are doing that.

Tom So the good news is they make their payments on time. But the bad news is they always have reoccurring high utilization. And what we’re talking about today is let’s change the behavior a little. Let’s pay not when it’s due, but let’s pay, what do we say here a few days before the actual end of the cycle.

Eddie — Yeah.

Tom — So before that 12th.

Eddie — That’s right. Before the bureaus get that, get that balance from your credit card company, pay down the balance a couple of days before. So the key is, and this particular credit card cycle, since the ends December 11th I would want to make my payment on this credit card balance about December 7th.

Tom — Yeah, yeah. Seventh, eighth. Okay. Now how much are they making it for? They haven’t yet spent all the $4,000 that they typically do it. Don’t worry. This is not rocket science. We don’t have to be exact.

Eddie — Just whatever your balance is, if you see that you have a balance of $3,500 send over $3,500.

Tom — Yeah, just go ahead and send it over. Now you’ll still have a few days to rack up some additional debt on that credit card, but it’ll be far lower than what it would have been if you would just keep doing what you’re doing.

Eddie — That’s right.

TomMy point is just simply move up the date at which you make your payment.

Eddie — That’s right. So for a lot of people, they don’t have the ability to have a high credit limit. So if you had like a $50,000 credit line on a credit card, you know, those folks don’t have to really worry about the credit utilization.

Eddie — But that’s unusual. Most people have $5000, $10,000 or $3000 you know?

Tom — Yeah.

Eddie — So people should know what their line is.

Tom — Yeah. I guess that would be one benefit. I never thought about that. That’s a good point. One benefit to increasing your credit line is so that you have a perpetual lower utilization rate.

Eddie — Yes. So the one thing you could do in your scenario is contact your credit card company and say, “Hey, can you bump up my line?”

Tom — Right.

Eddie — Okay, that’s one idea.

Tom — Right.

Eddie — But you still can do this, and everybody really should, and again, you could just put it on your calendar, a recurring event. Like if this was your credit card, you would say, pay that on the first week or the 7th of every month or whatever.

Eddie — But again, folks, if you’re, you know, some people just they really want to get their scores in the 800s they’re in that 760s 750s, that’s how you get your scores in the 800s.

Tom — In the 800s, right. Right.And don’t worry about making a payment even too big. Your credit card company knows where you are. Your credit card company knows what your account is, and they’ll keep a credit on there for you.

Eddie — Good point.

Tom — So the important thing is just make that payment. And even if it goes negative, I guess there could be a negative balance.

Eddie — Yeah, if you overpay, this is a credit towards your account, so it’s okay. There’s no problem.

Tom — So, okay, well hopefully that hasn’t been too complicated, but this is something totally in your control that you can set up. It’s awesome. It makes huge impacts. If we had to guess what it did to our credit scores, I mean it, it changes 10, 20 points.

Eddie — Yeah, I mean it’s a huge, it’s a huge piece.

Tom — Especially-

Eddie — [crosstalk 00:12:34] I’m just [inaudible 00:12:35] right now. It could be, it could account for potentially, well it could be a hundred points.

Tom — You think you could get that high? You know, probably-

Eddie — At 35% you know.

Tom — And it probably impacts the first time home buyers a little bit more where they have a little bit limited credit. So a bunch of their credit’s based off of these cards. And if they have two or three cards with high utilization-

Eddie — Yeah.

Tom — …that’s a lot different than someone who’s had credit for 10, 20 years and has 18 lines of it.

Eddie — Yeah. That’s true. If you have a lot of credit cards, the mathematical equation, you know, the algorithm is looking at all their credit to gather what the utilization is.

Tom — Right.

Eddie — But a lot of people, if you just have one credit card, that one credit card can affect your score greatly.

Tom — Yeah. Awesome. Well hopefully this helps everyone.

Eddie — So this does not have to do with installment loans. Okay. This is credit card, revolving. Okay, that’s something important. It isn’t if you have a car loan, student loans. What else Tom is you know any of these, you know, Home Depot? Well, no, Home Depot would be a revolving account. Unless it’s just like, you know, a construction, you know, one of these constructions.

Tom — Right.

Eddie — But again, a personal loan is an installment loan. We’re talking about credit cards, revolving credit. That’s what this is really, this tip is for.

Tom — Okay, awesome. Well are you ready to call it a day?

Eddie — All right. Have a good week.

Tom — All right.

Eddie —Go look at your credit cards.

Tom — That’s right. Get those paid early. Let’s go home.

Eddie — See you everyone and thanks for listening to the Mortgage Brothers show. Please let us know if you have any questions you’d like us to answer on this podcast. You can email your questions. There’s or yours truly at And be sure to ask us for a free quote on your next mortgage. Tom and I will personally work with you, and help you through the whole process.

Signature Home Loans, LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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