Credit utilization is a single measure that combines how much credit you have available (how much you’re allowed to borrow) and how much credit you’re using (how much you have borrowed). This one measure makes up roughly 30% of your FICO credit score. A simple example is a single credit card with a $5,000 credit limit. That’s $5,000 in available credit. If you have a $2,500 balance on that credit card that means you’re using 50% of your available credit so your credit utilization is 50%. Lenders want to see credit utilization of at, or below 30%.
Tip: The simplest way to improve credit utilization is to pay down credit balances. You can make multiple payments per month to keep it at an acceptable balance or you may decide to just pay it off completely. You can also request a higher credit limit from your card providers if your account is in good standing.
Bonus Tip: If you pay off the entire balance on a credit card, don’t necessarily close the card immediately! Closing the card will decrease how much credit you have and, as a result, raise (worsen) your credit utilization. But if there is a high annual fee on the card or it tempts you to spend more, closing the card may be a good trade-off.