role of credit utilization in your credit score
Understanding Credit Utilization
Credit utilization refers to the amount of credit you’re using compared to your available credit limit. For example, if you have a credit card with a $5,000 limit, and you’ve charged $2,500, your credit utilization is 50%.
Credit utilization is a critical factor in calculating your credit score because it reflects how much of your available credit you’re using. High credit utilization can indicate that you’re relying too heavily on credit, which can be a red flag for lenders.
Impact on Your Credit Score
Your credit utilization ratio is a significant factor in calculating your credit score. The general rule of thumb is to keep your credit utilization below 30% of your available credit limit. If your credit utilization ratio is higher than 30%, it can negatively impact your credit score.
For example, if you have a credit card with a $5,000 limit, and you’ve charged $4,000, your credit utilization is 80%, which can significantly impact your credit score. Lenders may view high credit utilization as a sign that you’re struggling financially or relying too heavily on credit.
