How FICO scores look at credit card limits
Your FICO® score assesses your risk based on the information on your credit report. An important factor is the category Amounts Owed, which accounts for roughly 30 percent of a typical person's FICO score.
Information about your credit limit falls into this category. However your FICO score does not consider your credit limit by itself. Instead, the FICO score considers your credit limit when determining your "credit utilization rate." Utilization means the amount of your available credit that you are using at the time your score is calculated.
Credit utilization rate is calculated by dividing an account's outstanding balance by its credit limit.
For example, say that Alice has a credit card with a $20,000 credit limit and a $10,000 balance. Alice's credit utilization rate on that account is 50 percent ($10,000 balance divided by $20,000 limit equals 0.50).
Credit utilization rate has proven to be extremely predictive of future repayment risk. So it is often an important factor in a person's score. Generally speaking, the higher your utilization rate is, the greater is the risk that you will default on a credit account within the next two years.
That's why it's always good advice to keep your credit card balances low - the lower the better. That helps ensure that your credit utilization rate stays low. More tips.
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