Why does higher credit utilization decrease your credit score?

A higher credit utilization indicates a tendency to spend more than you earn, indicating the possibility of not being able to repay the credit card balance on time. That is, a high credit utilization rate can mean you are close to maxing out your credit limit.

Credit utilization rate is the percentage of available credit that you are currently using. It is calculated by dividing the total amount of debt you owe on your credit cards by your total credit limit. For example, if you have a credit card with a $1,000 limit and you owe $500 on it, your credit utilization rate is 50%.

A high credit utilization can greatly decrease your credit score since it makes up 30% of your FICO® Score and is an extremely influential factor in your VantageScore®. The good news is that credit utilization is a factor that immediately affects your score. It does not leave a memory. Meaning, that your credit score can increase as soon as your credit utilization rate drops. Unlike other records such as payment history, it doesn’t stay in your report to negatively affect it. Your score drops only if your utilization ratio is high. It climbs back up once it goes below 30%.