Publish date:
Updated on

What Is Credit Utilization?

Learn about credit utilization in this Howcast finance video with expert Gregory McGraime.

Transcript

Credit utilization is one of the most important pieces of your credit score and how your credit score is calculated. And what it really means is how much are you borrowing relative to how much money you have access to. So let me give you an example. If I have a $5000 credit card, and i only have a $1000 balance on it, that a 20% utilization. I have access to $5000, I'm only using part of it. That's a good sign. It's like i have access to money and I'm not using a lot of it. If on the other hand, on that $5000 credit card I'm maxed out with a $5000 balance, that's a 100% utilization. That's gonna lower my credit score significantly because I'm deemed very risky. Even if I just have one card with high utilization, that can impact things quite a lot. So generally, one of the biggest things you wanna do as it relates to your credit score is to keep your utilization as low as possible. Now the question I get a lot of times from people is that I just paid off my credit card balance. Should I close the credit card completely? And the answer from a credit score perspective is no, leave it open. Because having that open card with no balance actually has a positive utilization. That's a 0% utilization. And in this crazy world of credit scores, that's deemed as behavior, and it's a sign that you might be more likely to pay bills in the future for obligations that you may have. So again, try to do whatever you can to keep your credit utilization as low unrisky as possible to maximize your credit score.

Popular Categories