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2. Credit Utilization: 30% of Your Score

Credit utilization is an industry term that expresses the ratio of your current credit card
balances to your credit limits on those cards.

So, let’s say you’ve got a credit card with a balance of $4,000 and a credit limit of $10,000.

In this case, utilization ratio would be 40%.

FICO and VantageScore reward borrowers who keep their credit utilization under 30% on
each card and overall.

According to FICO and VantageScore, your credit utilization is one of the most effective

ways to determine if you’re worthy of a loan.

Their thinking is that consumers who are using more of their credit card limits are facing
more difficult financial situations.

That makes decent sense. We use our credit cards in situations where:

• We don’t have enough cash to cover a purchase

• We think credit cards are free money
• We want rewards that require purchases

In the first scenario, we’re spending more than we have, which is a bad thing. In the

second and third scenarios, we’re borrowing money because we’re motivated by wants and
not by needs.

None of these scenarios represents sound financial thinking. FICO and VantageScore

know this, and that’s why they make credit utilization such a high priority.

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