What does 'utilization' refer to in the context of credit scores?

Utilization in the context of credit scores specifically refers to the percentage of the total credit limit that a borrower is currently using. This ratio is a significant factor influencing credit scores because it provides lenders with insight into how an individual manages their credit. A lower utilization rate typically indicates that a borrower is using credit responsibly and is less likely to overextend themselves financially, which can lead to a more favorable credit score.

Understanding how utilization works is crucial for maintaining a healthy credit score. For example, if someone has a credit limit of $10,000 and carries a balance of $2,000, their credit utilization rate would be 20%. Financial experts generally recommend keeping this ratio below 30% for optimal scoring. High utilization can signal financial distress to lenders, potentially resulting in a lower score.

The other options relate to various aspects of creditworthiness, but they do not define utilization. Average payment time relates to payment history, frequency of new credit applications ties into inquiries, and the history of late payments is also connected to payment behavior—all of which are important for a credit score, but none pertain to the specific concept of utilization.