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Understanding credit utilization

Q. A friend was recently explaining that a credit score is made up of different parts.  He told me that my credit score is based in part on what he called credit utilization, but I didn’t understand what he meant by this.  Can you explain what credit utilization is and why I should be concerned about it?

A. We all have multiple credit scores. The most common type of credit score is the FICO score by Fair Isaac. There are even multiple versions of the FICO score. Given the complexity of the credit scoring system, it helps to understand how your score is calculated.

Your score is calculated based on the following: Thirty-five percent of your credit score is based on your payment history, while 30 percent is based on your credit utilization. Fifteen percent of your score is based the length of your credit history, and 10 percent is based on the number of credit lines you have opened within the last 12 months. The last 10 percent of your credit score is based on the types of credit that have been extended to you.

The most significant factor in determining your credit score is how you handle your bills, but credit utilization—at 30 percent of your score—is a close second.  Credit utilization is the amount of credit that you have available to you that you are currently using. Let’s say you have two credit cards, each with a $5,000 credit limit. If you have charged $5,000 on each card, then you have utilized all the available credit to you, which will lower your credit score.   

Most people have and use credit. The key to building good credit is to manage it well. One way to do this is to ensure that you just don’t use all of the credit available to you. You might think of credit as you would a scale. As you pay down your balances, your score increases. Alternately, if you use more of the credit available and your balances increase, then your score decreases. You will need to find your own equilibrium.

Your credit score can change daily, as it represents a snapshot in time. Let’s say it’s a Monday and you have a $1,000 balance on your credit card.  On the following Friday, your payment of $1,000 posts to your credit card, bringing your balance to zero. In this scenario, your credit score on Monday would be different than what it would be on Friday.  

Your credit impacts you in a variety of ways. It can determine your ability to rent or buy a home, to get insurance and utilities or to purchase a car you need to get to work. In some cases, your credit history can even influence your ability to get a job. For lenders and prospective employers, your past history is a predictor of your future behavior.  This makes it even more important for you to learn how you can maintain or improve your score.

Bonnie Spain is the executive director of Consumer Credit Counseling Service of the Black Hills, a United Way member agency. For more information, email

The material in this transmission is provided for personal, non-commercial, educational, and informational purposes only. ACCE makes no representations or warranties with respect to the accuracy or completeness of the contents of this transmission and assumes no responsibility for errors, inaccuracies, omissions, or any inconsistency herein. You should consult a professional where appropriate.

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