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Will a large charge damage my credit score?

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By Eva Norlyk Smith Ph.D.
April 28, 2014

QHi Eva,

I've heard you're not supposed to go over 30 percent of your credit limit, or it hurts your credit. I have two cards, one with a $2,000 limit and one with $5,000. I'm going to buy my family plane tickets for a big trip. Since I'll be buying the tickets all at once, that's $4,000 total, which I'd put on the $5,000 limit card. So do I have to worry about credit damage? I could always pay with my debit, but I really want the travel protections that my credit card gives me. –Isaac

ADear Isaac,

You're correct: the basic rule of thumb for good credit management is to never carry balances above 30 percent of the credit limit on your card. In fact, it is best to keep balances in the 10 to 20 percent range.

This rule refers to the debt-to-credit ratio or credit utilization of FICO scores, the system most lenders use to assess creditworthiness. As 30 percent of the FICO score, the ratio can greatly affect scores. For comparison, payment history (i.e. whether you make payments in a timely manner), accounts for 35 percent; all other factors — such as length of credit history, number of new credit accounts and inquiries and credit mix — account for only 10 to 15 percent each.Ask Eva

As with all rules of thumb, however, many additional factors come into play, so the picture is much more nuanced than that simple rule implies. Here are a few additional considerations and how they'd affect the overall impact on your score.

1. Credit utilization is calculated both between and within cards. If you charge $4,000 to your $5,000 card, it puts your debt-to-credit ratio at 4,000/5,000, or 80 percent for that card. Between both of your cards, however, it will be $4,000/$7,000, or 57 percent credit utilization. It's still not great, but it softens the impact.

2. How quickly you pay off the balance matters. You can minimize the impact by paying off the balance in full right away. Card issuers only report balances on credit cards once a month; if you pay off the balance before the statement closing date, issuers won't report it. But even if you pay the balance over a couple of months, it will have a minimal effect on your score. Credit scoring models seek to capture people who constantly carry high balances and push against their credit limit, as they see this is a sign of financial problems.

3. Paying off a high balance quickly might even help your score. A recent trend in credit scoring is adding data on how quickly a consumer pays down credit balances, according to John Ulzheimer, an expert on credit reporting, credit scoring and identity theft.

This means that credit rating agencies now also capture data on the patterns of payments. This allows people who review credit reports to identify people who carry balances over from month to month, versus people who pay their balance in full each month. According to Ulzheimer, while this data is not yet part of credit scores, it's only a matter of time before it will be.

In the future, people who do not pay their balance off each month will likely see their credit score go down, while people who pay in full will see an increase. It's too early for this to affect you, but it's good to keep in mind.

So go ahead, charge that balance to get the protections you want. If you then turn right around and pay off the balance, you'll be just fine.

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