What is credit utilization, and why is it important?

Credit utilization refers to the ratio of a borrower’s current credit card balances to their credit limits. This ratio is crucial because it plays a significant role in determining credit scores. A lower credit utilization ratio indicates that a borrower is using a smaller portion of their available credit, which is generally viewed favorably by credit scoring models. Maintaining a low credit utilization can suggest to lenders that the borrower is managing their credit responsibly and is less likely to default on future obligations.

In terms of credit scores, financial experts often recommend keeping credit utilization below 30%, as this threshold can help improve creditworthiness. Therefore, a lower ratio has a direct positive influence on credit scores, making it an essential aspect for anyone looking to maintain or improve their credit health.

The other options touch on important concepts related to credit and finances but do not accurately describe credit utilization or its significance in the context of credit scores.