How Does Debt Usage/Utilization Affect Credit Scores?

After payment history, your overall debt is the second most important factor in your credit reports. When thinking about your debt in relation to your credit score, you might focus on the total amount of debt you owe. But credit scoring models often work somewhat differently. While the amount you owe is important, even more important is how you manage your revolving accounts, such as credit cards. Most credit scores will calculate something called a debt “usage” or “utilization” ratio by comparing the balance on each of your credit cards or other revolving accounts to the credit limit on those accounts. That comparison is your overall debt usage ratio.

Let’s say you have a credit card with a $1,000 credit limit, and the balance that appears on your credit report is $500. You are using 50 percent of your available credit, meaning you have a 50 percent debt usage ratio. Now let’s say your balance is $200 instead. Your debt usage ratio is 20 percent.

There is no universal rule or definition for a “good” ratio. The impact in part depends on all the other factors in your credit reports. But FICO does say that consumers with the highest credit scores tend to use less than 10 percent of their available credit.


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