Credit Utilization

What Is Credit Utilization?

Credit utilization is the percentage of available credit a borrower is currently using, usually measured on revolving accounts such as credit cards. It compares balances owed against total credit limits: a person using 200 dollars of a 1,000-dollar limit has a 20 percent utilization. Utilization falls within the amounts-owed category, which is roughly 30 percent of a standard FICO score and the second-largest factor after payment history. Because it is calculated from reported balances relative to limits, it can shift as balances rise and fall, making it one of the more changeable inputs to a score. It reflects how much of the credit extended to a borrower is being drawn upon at a given time, rather than any single transaction or long-term pattern of repayment.

Why It Matters

Credit utilization matters because it is a large and responsive component of the most widely used scoring model, so changes in balances can influence a score relatively quickly compared with slower-moving factors like length of history. It sits inside the amounts-owed category that makes up about 30 percent of a FICO score, second only to payment history. Since the ratio depends on both balances and total limits, it captures how heavily a borrower is leaning on available credit at a point in time. This is one reason carrying high revolving balances can weigh on a score even when payments are made on time. Understanding utilization clarifies why the relationship between balances and limits, not just whether bills are paid, feeds into how lenders assess credit.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is the second-largest factor in a standard FICO score, at roughly 30%?
  Amounts owed (including credit utilization)
• What is "credit utilization"?
  The percentage of available credit currently being used