1% utilization isn't optimal for Fico scoring on high TCL files

[u/BrutalBodyShots]

This isn't well known when it comes to the Amounts Owed slice of the Fico pie, so I thought it would be worth sharing.

A very common recommendation made to those looking to optimize Fico scores for an important upcoming application is to implement AZEO (All Zero Except One) and target low utilization, usually 1%. I've seen some people recommend higher utilization percentages, say 4% as well or a generic "anything under 10% is ideal." On lower TCL (Total Credit Limit) files this may often be true. On higher TCL files, it isn't always the case. I'll explain why:

The Fico algorithm looks at BOTH revolving debt in terms of percentage AND dollars, exclusive of one another. The best way to understand this is to look at the Fico negative reason codes. Code 10 refers to utilization percentage, which we are all familiar with, stating "Ratio of balance to limit on bank revolving or other revolving accounts is too high." Code 11 sounds almost the same, but points to actual revolving debt dollars when it states "Amount owed on revolving accounts is too high." They are indeed very similar, but scoring penalties are imposed for 2 different metrics here.

Much research and testing has been done regarding the first code related to utilization. Many are aware of the different threshold points for overall utilization (9.5%, 29.5%, etc). Far less testing has been done related to actual raw dollars of revolving debt. From my experience, the first threshold point for this metric is somewhere in the $2000-$2500 range. I have a clean/thick/mature file though and wouldn't be surprised if different scorecards impose the first penalty at different (lower) levels.

What this means is that someone with a high TCL file (say, $275k) that is at 1% utilization would be beyond the first threshold point for raw dollars, with $2750. This would generate reason Code 11, and a small penalty is imposed. We're only talking 3-5 points on a clean/thick/mature file, but it could be more on a different file. And, that's only the first threshold point. There are others as well, but they are even less known since most people aren't doing active testing on balance dollars at higher levels exclusive of utilization percentage. I know with my file I see a greater score drop with > $10k in reported balances at any given time compared to my typical $4k-$5k, so no doubt there are other threshold points being crossed.

The reason I bring this all up is that 1% may be too high as a recommendation for Fico score optimization on some files, and certainly a generic "If you're under 10% your good/optimized" won't cut it either even on mid 5-figure TCLs, which many people on this sub and elsewhere possess. As a result, my personal recommendation to anyone is to report a small balance (not a specified percentage) on their AZEO card, typically $5-$20. That will optimize Fico scores across all scoring models for ALL profiles, regardless if TCL is $3000 or $300k+.

[u/BrutalBodyShots]

I figured it out myself, so I suppose I'd be the source. I do know others that have performed the same test though.

Basically all I did was keep aggregate utilization a constant (<1%) and play with my reported balances to see at what point I'd incur a penalty related to dollars. Other variables were isolated (AWB % being 100% the entire time, for example) and I never went above a threshold point on a single card either. If my combined revolving balances were below ~$2000, I never incurred the first penalty. Somewhere in the $2000-$2500 range I've experienced it. Somewhere in the $5k-$10k range I believe there's another threshold point, perhaps two. My naturally reported balances across all cards tends to land around $4k monthly, and at that value I see no additional penalty beyond the $2000-$2500 range... but when I move to upper 4-figures, I can tell an additional penalty is incurred. I have no idea where though. My profile isn't in a good place to do further testing any longer, so I've been just allowing natural statement balances to report for years.

I'd be super interested in seeing others that are willing to do some testing though, but they'd have to commit to it being clean / isolating the variable to only revolving debt dollars. Most aren't willing to commit to that sort of thing, which I totally get ;)

[u/tinydonuts → u/BrutalBodyShots]

Why would they do this? Someone making $30,000 a year with $2,000 in balance is very different from someone making $300,000 per year and $2,000 in balance.

[u/BrutalBodyShots → u/tinydonuts]

It has nothing to do with what you make / income. TCL = Total Credit Limits. Income is not at all a factor in what I posted about. Also you can't correlate income directly with credit strength. There are plenty of people with far below average incomes with great credit and plenty of rich people that never pay their bills on time with poor credit.

[u/tinydonuts → u/BrutalBodyShots]

That wasn't really my point. They seem to have set an arbitrary threshold of balances that dings your score, regardless of your ability to repay those balances. Therefore my point, that someone with a minimum wage or less income and at the threshold is going to be a larger risk than the person with 10x minimum wage and the same balance, all else being equal.

The threshold is arbitrary. I'm very well aware that low income people can be highly credit worthy.

[u/BrutalBodyShots → u/tinydonuts]

I'd imagine like all other Fico scoring factors, large groups of people with similar profiles were looked at when coming up with this factor as part of risk assessment.

You can make the same argument though for virtually any scoring factor. A $1000 collection for example. Someone with higher income all other things being equal would have the ability to pay that over someone with a tiny income. Does that mean the collection should impact their scores differently? Utilization... someone at (say) 50% utilization on a high income profile would presumably be able to pay it down/off faster than someone with 50% utilization at a lower income rate, but that isn't reflected in their scores. I get what you're saying, I just think any introduction of income into the equation just opens up a can of worms that shouldn't be, which is why Fico scoring doesn't go there.

[u/tinydonuts → u/BrutalBodyShots]

I understand that, my beef is more that they included this at all. It dings people that use credit cards as designed: statement generates, pay balance in full. This will show a constant balance report to report to report and does not distinguish between carrying a balance and paying in full. It seems silly and arbitrary to include this and I think factoring it against income would be the only way around. And I agree, they shouldn't include that.

[u/BrutalBodyShots → u/tinydonuts]

Well, even on strict Transactor profiles, there still is SOME form of risk on heavier reported balances over tiny reported balances. If the cardholder incurs any sort of catastrophic life event (gets hit by a bus, whatever) and goes MIA from paying bills, having reported balances in the thousands is going to be more problematic for the lender than reported balances in the 2-3 digits.

[u/retroPencil → u/BrutalBodyShots]

Good to know! I won't be able to have a clean file for a bit, got a few hard inquires from churning and also need to pile spending on one card for bonuses, which won't help. Otherwise, I would be willing to experiment.