A:

Your credit utilization rate is a representation of the percentage of your current borrowing ability being used; basically how much you are borrowing relative to how much you could borrow through existing credit limits. Utilization rates are used to calculate credit scores, and lenders often rely on them in evaluating your ability to repay a potential loan. In fact, roughly 30% of your overall credit score is determined by your credit utilization. There is not a precise answer as to what your rate should be, but there are some general guidelines.

Most financial experts recommend a credit utilization rate below 30-40%, and some say that individual accounts should have rates as low as 10%. High utilization rates are a big indicator of credit risk, and your credit score becomes adversely impacted as your ratio approaches and exceeds 40%.

Remember that 70% of your credit rating is not determined by your utilization rate, so paying off your debts on time and avoiding enormous debt balances are at least as important as credit utilization. That said, you can reduce your utilization ratio in one of two ways: adding more credit limit by increasing the denominator or paying off existing balances by decreasing the numerator. Keep in mind that opening another credit account leads to a credit inquiry, which negatively impacts your credit score.

The simplest and most accurate way to think about your credit utilization ratio is this: the lower the ratio, the higher your credit score. It also matters when you pay down your balances. If the issuer reports the balance to credit reporting agencies before you make your payment, even if no payments have been missed, your utilization rate could actually be higher than your current balances reflect.

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