Understanding Your Credit Card Utilization Rate and Why It Matters
By Juan Carlos Rosales de la Garza
Credit card utilization is the percentage of your available credit that you are currently using. For example, if you have a combined limit of $1,000 across five credit cards and a total balance of $500, your utilization rate is 50%. This number matters because credit agencies use it to assess your level of risk as a borrower. Lenders also look at utilization to evaluate how much leverage you are using in your life. From their perspective, it is safer to see a healthy mix of your own funds and debt rather than heavy reliance on borrowed money. Someone who consistently uses too much debt is considered a higher risk, which can reduce their chances of obtaining new financing.
Beyond credit scoring impacts, high utilization creates another problem: it drains your wealth over time. When balances increase, the change in your monthly minimum payment may seem small, making it feel manageable. However, over time, this growing balance has a negative impact on your financial health because you end up paying significantly more in interest. The safest approach is to make full payments whenever possible and avoid carrying balances from month to month. This helps prevent interest charges and keeps your debt from snowballing.
Some people rely on credit cards to cover day-to-day expenses rather than using their own available cash. While this can be a valid strategy for those who take advantage of rewards programs, it requires strong discipline. Poor management can lead to a cycle where credit is used to cover financial gaps, interest payments increase every month, and the gaps only grow larger over time. For business owners, this is like “borrowing from tomorrow to pay for today,” which weakens financial stability.
As someone with experience in personal and business lending, I recommend monitoring your credit utilization closely and aiming to keep it under 30%. Always pay more than the minimum required and consider consolidating high-interest debt into lower-interest loans. Build an emergency fund with at least three months of fixed expenses so you don’t have to rely on debt when unexpected costs arise. Reducing your credit card utilization is not just about improving your credit score—it’s about freeing up monthly cash flow so you can invest in your business, your future, and maintain healthy finances.
Have questions about business lending or want to suggest a topic for next month’s column? Email Juan Carlos Rosales at jrosales@cedsfinance.org
About the Author: Juan Carlos Rosales de la Garza was born and raised in Mexico and is bilingual in English and Spanish. He holds a BA in Economics from the University of Texas and a Master’s in Finance from Harvard University. For the past three years, he has worked with CEDS Finance, gaining extensive experience in small business lending, underwriting, and entrepreneur mentoring.
