- Credit Utilization Rate
- An input used in determining a person's credit score. It is the amount of outstanding balances on all credit cards divided by the sum of each card's limit, and it's expressed as a percentage. For example, if you have a $2,000 balance on one card and a $3,000 balance on another, and each card has a $5,000 limit, your credit utilization rate would be 50%.
Credit issuers like to see a credit utilization rate of approximately 35% or less. Therefore, it is sometimes not in your favor to close credit cards without balances, or reduce your credit card limit. Just shifting balances from an existing card to another will not change the credit utilization rate, as it looks at the total amount of debt outstanding divided by your total credit card limits. In this case, you would be better off paying down debt as opposed to shifting from one of your credit cards to another.
Investment dictionary. Academic. 2012.
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