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If today were your first to have ever received a credit card, you would find it in mint condition having never been used. The new plastic smell, the urging itch to go buy something just to see if it works—oh the power of credit.
And off you go to the nearest retail store down the street to buy a new pair of jeans. Your $1,000 limit quickly shrinks to $880 because of your splurging appetite to keep up with the latest fashion.
The following month you decide to check your credit score. Having hopes of this three-digit number still being above 770 or higher, it has become a game for you to see how high you can float this score up. To your dismay, you discover your credit score didn’t just float, but it floated down like a balloon that lost some of its helium.
This is the impact of credit utilization. The $1,000 credit limit previously had a 0% utilization rate, meaning 100% of it was still available but now after wearing those new jeans, it sits at 12% ($120 / $1000). So why does this matter?
Well Credit Utilization is a percentage determined by the numbers above that provide a snapshot into your spending habits and your ability in being responsible. It is a measurement, none the less, of your credit card balances. With this figure, the lower the percentage, the more favorable your credit score is. Maintaining a low utilization percentage reflects to lenders and other institutions that you only use a small portion of your credit.
"...the lower the percentage, the more favorable your credit score is."
According to FICO, this ratio makes up about 30% of your credit score. So almost 1/3 of your score is determined by this. That is why credit utilization is so important. Not being responsible with this number can impact your ability to get a new auto loan, refinance your mortgage, or possibly co-signing. Thereby, impacting your household and family members. This is why financiers and those credit savvy will state to keep a low balance on your credits card if any at all.
Picture a teeter totter. With your credit utilization score being on one end, and your credit balance on the other. The heavier the credit balance gets, the lower it drops and the higher the credit utilization will rise. It has an inverse relationship and is a strong key component to your credit score. Protect it and be responsible.