Credit Card Basics

How Important is Credit Card Utilization?

Credit card utilization is the second most important factor in credit scores. Your utilization rate, or balance-to-limit ratio, is simply the total of your credit card balances divided by the total of your credit card limits, generally expressed as a percentage.

High balances are a sign that you may be overextending your credit card use, which could result in an inability to repay the debt if you had a financial setback.

As a rule, you never want the total of your balances to be more than 30 percent of the total of your credit limits. For example, if your total credit limit is $10,000, your total revolving balance shouldn't exceed $3,000. The same applies to the individual balance on each card, which shouldn't be higher than 30 percent of that card's credit limit.

Ideally, it is best to pay your balance in full each month and not carry a balance at all. In fact, people with the best credit scores have utilization rates of less than 10 percent.

Generally, a low credit utilization rate is considered an indicator that you're doing a good job of managing your credit responsibly because you're far from overspending. A higher utilization rate, however, could concern potential lenders or creditors that you are at risk of having trouble managing your finances.

More information on utilization rates can be found on the Ask Experian blog.

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Scoped on: 6/6/2017