Credit Score Pareto Chart and the Road To 800 Part 1 of 3: Utilization Rate

Written by Dom
Community Founder 
"I grew my net worth from -$32k to over $100k in 5 years."

Edited by Kay

​My FICO Score

​Credit Score Pareto Chart

​Par--- What?

This is the Pareto Chart for your credit score. Companies use Pareto Charts when analyzing processes that need improvement. They help determine the defects behind the processes and the changes that will make the biggest impacts the fastest without having to fix everything at once. If you address the factors that cause the most problems, you will see drastic improvement quickly. The highest factor is on the left and the lowest factor on the right. The line shows the cumulative effect as you go across the chart. Typically the Pareto process focuses on fixing the top issues that make up an 80% cumulative impact. For your credit score, the most impactful factors are 'Payment History' and 'Utilization Rate', which make up 65% of the score. Therefore addressing these factors first will give you the biggest bang for your buck. 

One example of the Pareto Chart process could be a company analyzing defects from their manufactured doll. The Process Engineers or assigned team would use a large sample size of dolls to note the defects and how many dolls experienced each defect. Out of a bath of 1,000, they could find 350 dolls with paint issues, 300 dolls with heads put on backwards, 150 dolls missing arms, 150 dolls with scratched legs. The team would then document and graph the defects in a Pareto Chart and tackle the most commonly occurring issue first; in this case it would be paint issues. To fix the problem the engineers may watch the process of the doll being made for days while recording the exact steps and timing of the machining processes. They may find that the paint issue is caused by shift changes where the new assembler places the dolls incorrectly or that the machine is running too long and needs more paint.
​
I am calling you to use the Pareto Chart I have created for your credit score and then analyze what you can do to tackle the biggest factors affecting your score so you can get to the 800s.

Credit Card Factors in Order of Significance:

• Payment History – 35%
• Utilization Rate – 30%
• Age of Credit History – 15%
• Accounts Mix – 10%
• Hard Inquiries and New Accounts – 10%

We’ll Start with Utilization Rate (Slightly Un-Pareto of Me)

What is it? It is the total amount of credit card balance divided by the total amount of credit card limit. Many say that having this number at 30% is ideal, but I did not start seeing drastic moves to the 800 score until I got this down to 20%, then 10%, and then less than 1% - where my cards currently always close at today.

You may be thinking, "under 1%!? That’s insane. I use my credit card at more than 1%." Well, most people do. I now have an absurdly large credit limit. Having over 1% of my credit limit would definitely be the start of having a credit card debt issue, but before I got those high in the sky limits I did one thing every single month to help my score. 
​

• Tip #1: I pay down my card to close at 1% or less. 

Technically unless you are specifically getting your credit checked by someone or a company, there are truly only changes to your individual credit accounts once per month, and those occur when the individual account statement closes. That’s when your credit card reports the most recent stats that affect your score. So to beat the system, you may use 30% or more of your credit limit but you can pay those balances down before the report date--the date the statement closes. It's like when you really start flossing morning and night the month before your dentist appointment.
​
You may be thinking, "well that’s good and dandy but I have credit card debt, so I can’t get that percentage down so easily." BEEN THERE. One tool I used to help me escape the credit card debt trap…
​

• Tip #2: I escaped paying high interest rates using Balance Transfers

With a Balance Transfer you pay a small fee, often 5% of the amount you want to transfer, to get a length of time where you have no APR to pay on that amount. Some companies may offer you a promotional rate of 0% balance transfer fee, so make sure to do your research to find the lowest rate available to you.
​

• Tip #3: Call your credit cards and ask for a promotional balance transfer rate

​​Example (direct from an old 2015 statement):
Balance: $1,699.55
Purchases APR: 15.99%
Minimum Payment: $25

IF YOU ADD NO ADDITIONAL CHARGES:

​The interest is literally set up so that you can never escape. Thus, balance transfer.

Example:
Balance Transfer Fee: 5%
Cost: $84.97 ($1,699.55 x 0.05)
Term: 12 months of 0% interest rate

​Meaning you need to:
Pay that debt off within 12 months to not get stuck in a new interest trap. Calculate how fast you want to and CAN afford to pay off the balance AND ACTUALLY DO IT.

Example:
Goal: 6 months because based on my bills and other debts, it’s what I can afford
Payment = ($1,699.55 + $84.97)/6 = $297.42 per month
Total cost of $1,699.55 debt with 5% Balance Transfer: $1,784.52

​Why would the credit card companies give you an opportunity to save on interest? Well, because they are betting that they will win and you will lose and you’ll end up paying them three grand instead of the previous company getting that money. Take it personally and prove them wrong. You got this!​​

​Summary:

• Pareto charts help identify what is the most significant issue to your problem
• Utilization Rate is your balance/limit and makes up 30% of your score
• Tip #1: Pay down balance before the statement closes
• Tip #2: Use Balance Transfers to get around your APR
• Tip #3 (bonus): Call your cards and ask for a Balance Transfer (and ask for a discount percentage)

​
​We’ll continue with Payment History next time… Many blessings, much favor, and wisdom to you!

Sources:
1. “How Your Credit Score Is Calculated.” How to Calculate Your Credit Score - Get Credit Report - Wells Fargo, www.wellsfargo.com/financial-education/credit-management/calculate-credit-score/.

Return to blog page