credit utilization
The ratio of current revolving credit balances to total available credit limits, expressed as a percentage. Lower utilization improves credit scores.
Example
“With a $10,000 credit limit and a $2,000 balance, her credit utilization ratio was 20%.”
Memory Tip
Utilization = how much of your limit you're USING. Keep it under 30%.
Why It Matters
Credit utilization is one of the most important factors affecting your credit score, typically accounting for about 30 percent of your overall score. Keeping your utilization low demonstrates that you can manage credit responsibly and do not rely heavily on borrowed money, which makes lenders more confident in your ability to repay new credit.
Common Misconception
Many people believe that carrying a balance on their credit cards helps build credit, but this is false and actually hurts your credit utilization ratio. You can benefit from good credit utilization without paying any interest by using your cards for small purchases and paying them off in full each month.
In Practice
Suppose you have three credit cards with limits of 5000 dollars, 3000 dollars, and 2000 dollars, giving you a total available credit of 10000 dollars. If you currently have balances of 500 dollars, 400 dollars, and 100 dollars respectively, your total balance is 1000 dollars, which means your credit utilization is 10 percent, a healthy ratio that will positively impact your credit score.
Etymology
From Latin 'creditus' + 'utilizare' (to use, make use of).
Common Misspellings
Check your credit score free — no impact
Related Terms
More in credit
Other credit terms you should know
See Also
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