Credit scores are used in countless transactions every year, from credit card applications to mortgage loans to tenant screening. The VantageScore model is not used for this, but there are even specialized scoring models used for insurance underwriting. Widely recognized as important risk-management tools, credit scores are derived from data found in consumer credit reports.
One of the most important measurements in your credit scores is your percent of credit limit used.
As it pertains to your credit reports, this term most commonly refers to how you’ve leveraged your credit card accounts. (You can also measure utilization on installment accounts, such as mortgages and auto loans, but the figures for unsecured credit card accounts play a much larger role in determining your credit score.) The balances on your credit cards relative to the credit limits for each account is called revolving percentage of credit limit used or, more informally, the debt-to-limit ratio. The lower that ratio, and similar metrics, the higher your credit scores are going to be.
Percent of credit limit used is highly influential on your VantageScore credit score. For consumers looking for best-practices guidance, VantageScore Solutions suggests not exceeding 30% of your credit limits.
Delving more deeply into this issue, scoring systems typically consider aggregate percent of credit limit used a highly significant metric. To calculate this, the model adds up the outstanding balances on all your open credit cards and divides the total by the sum of the credit limits for those accounts.
Here’s an example of how the math works. A typical consumer, Ebenezer S., has four open credit card accounts on his credit reports.
Ebenezer’s aggregate percent of credit limit used is calculated by dividing his total credit card balances ($2,250) by the total credit limits on all four of his cards ($13,750), which yields a very respectable ratio of 16%.
While this aggregate calculation is paramount to earning and maintaining solid credit scores, scoring models also consider percent of credit limit used on a card-by-card basis. So, again referring to Ebenezer’s accounts:
Scoring systems will penalize you for having too many cards with high percentages of credit limit used, so the goal is to maintain lower balances relative to your limits in all scenarios.
A few observations, in light of these facts: