Credit utilization is the share of your available revolving credit that you are currently using. If your cards have a combined limit of $10,000 and your statements show $2,500 in balances, your utilization is 25 percent. It is one of the largest factors in most credit scoring models, second only to payment history.
Scoring models read high utilization as a sign of financial stress. Even if you pay in full every month, a large balance reported on your statement date can pull your score down temporarily. That surprises many people who never carry debt.
The thresholds that matter
A common rule of thumb is to keep utilization below 30 percent, but people with the strongest scores tend to stay under 10 percent. The ratio is measured both across all of your cards and on each card individually, so maxing out a single card can hurt even when your overall number looks fine.
Simple ways to bring it down
Pay down balances before the statement closing date rather than waiting for the due date, so a smaller balance gets reported. Ask for a credit limit increase once you have a few months of on-time payments, as long as the request does not trigger a hard inquiry. Avoid closing old cards with no annual fee, because their limits count in your favor.
The good news is that utilization has no long memory. Unlike a late payment, which can linger on your report for years, a high ratio stops affecting your score as soon as lower balances are reported.
