What does 'credit utilization ratio' indicate?

The credit utilization ratio is an important metric in personal finance that indicates the percentage of available credit being used by a borrower. This ratio is calculated by dividing the total amount of credit used by the total amount of credit available. It is significant because it reflects how effectively an individual manages their credit. A lower credit utilization ratio typically suggests responsible credit use and can positively impact a person’s credit score, as it indicates a lower risk of defaulting on debts.

Maintaining a low credit utilization ratio is generally recommended, with experts often suggesting keeping it below 30%. High utilization can signal to lenders that a borrower may be financially overextended or reliant on credit, which can negatively affect creditworthiness.

In contrast, other answer options focus on different aspects of credit management. The total amount of loans taken relates more to overall indebtedness rather than credit usage. The number of credit accounts held provides insight into credit diversity but doesn’t measure how much credit is being used compared to what is available. Lastly, the credit score is an overall representation of creditworthiness derived from various factors, but it does not specifically convey information about credit utilization itself.