Question 1

Can a high credit utilization ratio hurt your credit score?

Accepted Answer

Credit utilization is one of the factors that may significantly impact credit scores. Using a large portion of your available credit may lower your score because it signals you might be over extended and at risk of not being able to make your payments. A low credit utilization rate points to better borrowing habits. So how does it factor in your credit score? Credit bureaus use credit scoring models (or mathematical algorithms) to arrive at your credit score. They base the calculation on the information in your credit report (a record of your borrowing and repayment activity). Credit utilization typically accounts for 30% of your credit score, depending on which credit scoring model is used. So, the amount you owe when lenders report your credit information to the credit bureaus may affect your score. Lenders usually report your account balances to credit bureaus at the end of your billing cycle, about every 30 to 45 days. That means a credit bureau can't see your daily credit card balances; they only know the amount you owe on your monthly billing statements, which is the amount reflected on your credit report and score as amounts owed. Say you make a large purchase on one of your credit cards and don't make a payment towards it before the credit card company issues your monthly statement. In that case, the credit utilization on your credit report will reflect the large purchase. This may increase your utilization and potentially lower your credit score. However, your credit score should bounce back once you pay off the balance.

Question 2

What is a good credit utilization ratio?

Accepted Answer

We've established that it's best to have a low credit utilization ratio, but how low is low enough? Experts like the Office of Financial Readiness suggest a credit utilization ratio of 1-10%. But you may not want to go too low; a 0% credit ratio may help your credit score if you're actively using your card, but a 0% ratio from inactive credit use may not. Part of building a good credit history is showing you can borrow and repay your debt. That means using your credit and managing it responsibly.

What is Your Credit Utilization Ratio?

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