In the context of credit cards, what does the term "credit utilization" refer to?

The term "credit utilization" refers to the percentage of credit you are currently using compared to your total credit limit. It is a key factor in credit scoring models, as it helps lenders assess how responsibly you manage credit. A lower credit utilization ratio generally indicates responsible credit usage, which can positively impact your credit score. Ideally, it is recommended to keep this ratio below 30% to maintain a healthy credit profile.

Understanding credit utilization is essential because it not only reflects your borrowing habits but also influences your creditworthiness in the eyes of potential lenders. A high utilization ratio may suggest that you are overly reliant on credit, which could pose a risk to lenders, while a lower ratio shows that you manage credit wisely.