Your Money, Your Goals - A financial empowerment toolkit for social services programs.

Credit utilization rate

Credit scoring models penalize you for using too much of the credit you have available to

you. This means your credit score may drop if you use more than 30% of the revolving

credit you have available to you. The easiest way to understand credit utilization is

through an example:

If someone had a credit card with a $5,000 credit limit, and she had charged $3,500 on

this card, her credit utilization rate is calculated as follows:

$3,500 (amount charged to credit card) divided by $5,000 (credit limit) = .7 or 70%

To figure out the maximum that she should charge on this card if she wants to maintain

her credit score:

$5,000 (the credit limit) multiplied by .3 (30%) = $1,500.

Does this mean that only the unpaid balance is counted toward the credit utilization rate?

The answer is no. If at any time during the month you use more than 30% of your

available credit limit, you run the risk of your credit score dropping.

If you know you have more than 30% of your credit limit charged on your card, you may

want to get your credit utilization rate below 30% by paying down your credit card before

you apply for new credit.

Amounts owed includes whether you are paying down your loan balances as agreed. It also
includes your credit utilization rate. Your credit utilization rate is how much of your available
credit you are using. If you use more than 30% of your credit limits, your scores may drop.

Length of credit history is the next factor that impacts your scores. Your score increases the
longer you have a credit history.

New credit tracks your inquiries. If you have too many inquiries, the model interprets this to
mean you have a high demand for credit, which may be an indicator of risk, and your scores may
drop. When you are shopping for a home,, car, or student loan, however, most models give you a