Available credit/utilization and credit score question

[reedda]

My friend and I are having a discussion about how credit utilization affects credit score. It sounds like she's right, based on her experience, but I'm having a hard time wrapping my brain around it.

Hypothetical Situation:
CC1 - 7500 credit limit
CC2 - 2500 credit limit
CC3 - 1000 credit limit

Which of these is better for credit score:
CC1 - balance 5300
CC2 - 0 balance
CC3 - 0 balance

or

CC1 - balance 3700
CC2 - balance 1200
CC3 - balance 400

My friend says that each credit card is looked at separately and "points are taken off" for balances over 50% of available credit. She claims she has bumped her credit score up significantly in a month or so time period by paying each credit card balance enough to get it under 50%. (Then she has used her new credit score to get a loan or whatever it was she needed).

Is this really how it works?

((DISCLAIMER: I am not looking to bump my credit score to get a new loan or anything. I'm just wondering if this is true, or if anyone else has experiences like this))

[Petunia 100]

It is the overall utilization which is scored, not each individual card. And the magic number is 30%, not 50%. You lose points for utilization above 30%.

ETA: A person's credit score could temporarily improve by following your friend's strategy. Credit cards report your balance as of your last statement, not your daily balance. So, if you are transferring a balance, it is quite possible that Card A reports your new lower balance but there is a time lag before Card B reports your new higher balance, thereby creating a window of time during which your credit utilization ratio looks smaller than it actually is. In my opinion, if a person has to resort to this tactic to be approved for a new loan, they are living WAY too close to the edge.

[disneysteve]

It is the overall utilization which is scored, not each individual card. And the magic number is 30%, not 50%. You lose points for utilization above 30%.

I'm not entirely sure I agree, if for no other reason than I don't think anybody outside of Fair Isaacs knows the formula for sure. I agree that you lose points for utilization over 30% but I think the higher than number goes, the more points you lose, so 30% is better than 50% but 50% is better than 70%.

As for the individual cards not mattering, only the overall number, that would mean that maxing out one of my cards wouldn't matter as long as the overall number was low. I'm not sure that's right either, but again, I don't think anybody really knows. That's just always been my impression.

My advice would be to keep all cards under 30% as opposed to one maxed and the rest at zero. Of course, my actual advice would be to never carry a balance because it means you are living beyond your means and buying crap you can't afford.

[Petunia 100]

It is true that the exact algorithms used by Fair Isaacs are not avaiable to the public. Still, there are places one can turn to answer these questions; one such place is Credit Karma.

According to Credit Karma, it is the total utilization which is scored:

Credit card utilization refers to how much of your available credit you use on a monthly basis and is a metric often used in credit scoring algorithms. It is defined as your total credit card balances divided by your total credit card limits.

According to Credit Karma, the recommended limit of usage for optimum score is 30%:

•Experts recommend keeping your credit card utilization below 30 percent on each card and collectively.

https://www.creditkarma.com/article/credit-card-utilization

I feel comfortable that Credit Karma is a reliable source of information. Your mileage may vary.