What does credit utilization measure?

Credit utilization specifically measures the amount of credit a consumer is currently using compared to their total available credit. This metric is crucial as it helps lenders assess a consumer's credit risk. A lower credit utilization ratio typically indicates that a consumer is managing their credit well, while a higher ratio may signal that they are relying heavily on credit, which could raise concerns about their financial management.

By evaluating this percentage, lenders also determine how much of a borrower's available credit is in use, which can have a significant impact on credit scores. Generally, it is advisable to maintain a credit utilization ratio below 30% to ensure a favorable credit rating. Understanding this concept is critical for anyone looking to manage their credit effectively and improve their overall financial health.