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MarvBear

Overall Revolving Utilization

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I asked this one time before, but in order to clarify........

 

Pretend I am a total NEWBIE.

 

I do NOT care about FICO scores.

 

I do not care about individual utilization on any one credit card and its affect on a score nor the consequences of running up only one card to the max.

 

ONLY THE SUBJECT MATTER.

 

Can someone clearly and concisely explain the concept of TOTAL OVERALL REVOLVING UTILIZATION in very simple layman terms that a NEWBIE the first time reading would emphatically understand with an example as a guide?

 

Working on a project and I would appreciate the board members input.

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Simple to explain: Add up the balances on all revolving accounts, and divide by the total of the credit limits on the accounts.

 

Why do banks care? Someone with high utilization is considered a worse credit risk because that person seems to have the tendency to max all the credit they can get rather than thinking about if they will ever be able to repay.

 

Practical shortcomings: Many. First look at the basic assumption. Consumers with previous bad credit or limited credit history qualify only for small amounts of revolving credit. If they don't know how the system works, they may use it to the limit, because they know they can easily repay. On the other hand, banks give impossibly high limits to those with good credit, and if those are highly utilized it certainly indicates trouble later. But the limits are so high though, that someone who has applied for numerous accounts and credit line increases may be in real trouble at 25% utilization.

 

A particular credit card company, Capital One, has decided to throw a monkeywrench into the whole system by not reporting the credit limit on their accounts. This gives them a competetive advantage because they can know a consumer's true utilization but others won't.

 

Certain products are revolving though they are intended for longer-term debt that is traditionally installment. Home equity lines of credit are the main example. These really kill utilization because typically the consumer will apply for the amount needed, then take 100% of it at first. Storefront finance company loans are also often promoted like they are installment but actually written as revolving. This allows the creditor to take advantage of different regulations and also promote a lower payment (the time required to repay need not be disclosed on revolving). Again the utilization on these starts at 100%.

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Maybe something like this?

 

 

Let's say you have 3 revolving credit accounts:

 

Account #1 - CL= $5,000 Balance = $3,000 Utilization = 60%

 

Account #2 - CL= $8,000 Balance = $2,000 Utilization = 25%

 

Account #3 - CL= $10,000 Balance = $4,000 Utilization = 40%

 

Now you add them up:

 

Total of CL's: $23,000

 

Total Balances: $9,000

 

To get the percentage you divide the Balance by the CL:

 

$9,000 ÷ $23,000 = 39% Total Overall Revolving Utilization

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