What does the credit utilization ratio represent?

The credit utilization ratio represents the amount of credit used compared to the total available credit limit. This ratio is an important factor in determining an individual's credit score because it reflects how much of the available credit is being utilized. A lower credit utilization ratio is generally viewed positively, indicating that the borrower is not overly reliant on credit and is managing their debt responsibly. For example, if someone has a total credit limit of $10,000 and has used $3,000 of that credit, their credit utilization ratio would be 30%. Credit scoring models often recommend keeping this ratio below 30% to maintain a healthy credit score.