What is credit utilization?

Credit utilization refers specifically to the ratio of the amount of credit you are using compared to your total available credit. This is a critical metric in personal finance and credit scoring because it reflects how much of your available credit you are actually utilizing. A lower credit utilization ratio is generally seen as favorable by lenders, as it suggests that you are not overly reliant on credit and are managing your borrowing responsibly.

For example, if you have a credit limit of $10,000 and your current balances add up to $3,000, your credit utilization would be 30%. Maintaining a credit utilization ratio below 30% is typically recommended, as it can positively impact your credit score.

The other choices do not capture the essence of credit utilization: one focuses solely on the total available credit without considering how much of it is used, while another refers to the number of credit accounts, which does not directly relate to usage. The final choice discusses the percentage of cards that carry a balance, which is a different concept and does not effectively measure usage against available credit.