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Hey guys Sean Mory joining you for another session of LenCred Credit Geek Q&A.Today we are talking about something specific to Dustin Weitzell and I. This topic kind of hits a soft spot for me and my credit nerd emotions. The biggest issue we see on a regular basis. Dustin, you start please this one is challenging. I forget is it Christee out of New Hampshire. Christee’s question is, “Why is utilization so important for personal credit and business credit?” Her FICO Score should be maybe 750 to 780 and she is at 600. Really when you look at her personal credit reports she has great age of file, everything looked great, vary minimal inquires, but her credit car utilization is at about 79% to 80%. Utilization is your total revolving credit balances… it find your utilization rate divide your total revolving credit balances by your total revolving credit limits. Ideally you want to be around 30% or less on your overall credit card utilization. So if you have $100,000 to make this easy you want to be using $30,000 or less typically, when you are going to borrow. Just know if you are 90% utilized you are probably not going to be able to get some more money from lenders.
Essentially what she realized is that utilization is 35% of her overall FICO Score. This is a huge piece of lenders underwriting. We get client from 590 to 788 just by helping them pay down some of their debt because they did not know hey I made all my payment on time for 5 years, I have not needed to borrow any money but my score so low. Did you not just do that the other day with someone? Did you not take someone from a 560 to 590 up to 800. It was 800 on the dot, and it was essentially just his pay downs. He used all the money we gave him, pretty much the way we taught him to use it, and he was putting money in his savings because he was raised to do savings. When we told the benefit of paying down it was an easy fix and you want to talk about someone who was a believer and came back. Now he just wants to move out to Arkansas and be apart of this community.
I think what is so powerful in what you said that I want to piggyback on is 35% of your score is derived specifically from this category. This is the best I always describe this to my clients. Let’s say I have one credit card in my personal name and you have ten. We both make perfect payments for 12 months straight. I know have 12 months of perfect payment history where as you have 120 months created because you have multiple credit lines you are making your monthly payments on. The more revolving credit you have the better. John Ulzheimer calls this credit utilization insurance. Very simply put this shows lenders that you know how to spend a lot of money, spend it well, pay it back well, and be a steward of your money. It is about being responsible with your credit and showing them you can borrow money. If you have never leveraged $10,000 on a credit card before and you have only leveraged $1,000 ever. Do not expect to get $100,000 or $50,000. The reality is do not expect to borrow in a way that you have never borrowed before. Instead look at it like this, I have to continuously built more credit, get more revolving credit, and show that I love to use that money, let those lenders make some money off of me in that interest rate, and THEN I can build a relationship to get bigger limits, lower rates, and get money that really can be advantageous for your personal and/or business spending.
Not to mention it is going to automatically organically create an increase FICO Score. Obviously on the business side, the one thing that comes to mind is our first 3 to 5 clients we had originally that came through as SBA. Why is it that the clients with 30% utilization on revolving lines FICO Scores shooting up faster than the clients who had SBA loans? Because an SBA Loan is an installment loan which is weighed differently than revolving lines. So while the clients with the SBA Loan were showing one positive payment a month the clients with multiple revolving credits lines were showing 45 positive payments in that same time because it was spread among 5 cards. An SBA Loan is great but the combination of an SBA Loan and Unsecured Business Lines of Credit is even better.
With the loan piece you know, you only get that money once. So it is not like you can keep spending that, the bank is like I will give it to him this one time for this amount of time and if they pay it back MAYBE again I will lend to them in the future. With revolving line like credit cards, especially with business credit lines that do not report to you personal credit at all. Nobody but that lender is going to know how you are spending. Hope that answers your guys thoughts there and we really did not get to go to deep into it but the simple fact is your revolving credit is going to play 1/3 of a role in your FICO Score so that is a big piece on how you are able to borrow. Everyone have a great day!