Credit can be confusing, especially once terms like “utilization rate” get thrown into the mix. Yet this factor is extremely important for some lenders when evaluating a consumer’s credit.
One confused consumer recently wrote into the New Jersey Star-Ledger after being denied on their credit card application. The consumer claimed that they had a score well into the 700s with a credit utilization ratio of about 25 percent, but was still denied on the loan for having paid too little over the past 12 months.
A credit utilization ratio is basically how much of one’s available credit that one is using. A card might have a limit of $10,000, but using more than about $3,000 of this at any one time can negatively impact a credit score – even if a borrower pays it all back in full quickly.
In this case, the news source says that the borrower may have only been using 25 percent. But if the buyer applied at a poor time, like before they had paid their bill, the credit card company would have likely seen a much higher ratio when looking at the finances.
A consumer may not even have a bad credit history and still be penalized for their high utilization rate. This is why it’s important to curtail credit card spending and pay down all debts whenever one is planning to apply for a car loan or credit card.