How Credit Utilization Can Hurt Your Credit Score

One of the most important factors in your credit score is credit utilization, or how much of your credit limits you use at a given point. This scoring factor can be easily gamed by managing your account balance for your benefit, helping you achieve a higher credit score by paying down your balance and being smart with your credit limits.

The whole goal of the credit scoring algorithms is to determine how likely it is that someone will default on his or her obligations in the next six or 12 months. To that end, credit utilization is a pretty reliable indicator that a borrower is encountering financial stress.

Suppose we have two people, each of whom has a credit card with a $10,000 credit limit. One person has a balance of $8,000. The other person has a balance of $500.

Source: Fool.com