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Credit Utilization Ratio
Definition
Credit utilization ratio is the percentage of available credit you are currently using, a key factor in credit scoring.
Explanation
Credit utilization accounts for 30% of your FICO score. It's calculated by dividing total credit card balances by total credit limits. A ratio below 30% is good, below 10% is excellent. High utilization suggests you're overextended and can significantly lower your score.
You can improve utilization by paying down balances, requesting credit limit increases, or opening new accounts (though this temporarily lowers your score).
Example
Total credit limits: $20,000. Total balances: $5,000. Credit utilization = 25%. If balances drop to $1,000, utilization improves to 5%, boosting your score.