What is a utilization rate in credit cards?

• A. The annual interest rate on a loan.
• B. The number of credit inquiries in a year.
• C. The percentage of a credit limit currently being used; high utilization can lower credit score.
• D. The total number of active credit cards.

Answer: (C)

Utilization rate is the percentage of your available credit that you’re using. It’s found by dividing your current balance by your total credit limit and expressing it as a percent. This matters because credit scoring models view high utilization as a sign you may be overextended, which can lower your score. Keeping utilization low shows responsible use of credit and can help maintain or improve your score. For example, if you have a total credit limit of $5,000 and a balance of $2,000, your utilization is 40%. Bringing that down to $1,000 (or increasing your limits while keeping balances steady) lowers the utilization and can help your score. High utilization on any card or overall can negatively affect your score, affecting future borrowing terms. The other ideas refer to different concepts: the annual interest rate is the cost of borrowing on a balance, not how much of your credit you’re using; the number of credit inquiries relates to how often you’ve asked for new credit; and the total number of active credit cards is about how many accounts you have, not how much you’re using.