How does credit utilization affect credit scores?

Credit utilization is a key factor in determining credit scores, and understanding its impact is crucial for maintaining a healthy credit profile. When a person has a high credit utilization rate, which is the percentage of available credit being used, it can signal to lenders that they may be over-reliant on credit, potentially indicating financial distress or higher risk. As a result, credit scoring models often penalize individuals with higher utilization rates, leading to a decrease in their credit scores.

Typically, it is recommended to keep credit utilization below 30% of available credit. Lower utilization demonstrates responsible credit management and can positively influence credit scores. Conversely, if a person frequently approaches or exceeds this recommended threshold, their credit score can suffer. Therefore, managing credit utilization effectively is an essential strategy for anyone looking to maintain or improve their credit scores over time.