Question
1. If you have a credit card with a limit of $2,000. If you have a balance of $500, what is your credit utilization %?
2. What value does it recommend keeping your credit utilization % below?
3. Let's say you pay off a credit card that you don't plan to use again. Why may it be a good idea not to close it?
2. What value does it recommend keeping your credit utilization % below?
3. Let's say you pay off a credit card that you don't plan to use again. Why may it be a good idea not to close it?
Answers
GPT-4o mini
1. To calculate your credit utilization percentage, you can use the following formula:
\[
\text{Credit Utilization \%} = \left( \frac{\text{Credit Card Balance}}{\text{Credit Card Limit}} \right) \times 100
\]
In your case:
- Credit Card Balance: $500
- Credit Card Limit: $2,000
Plugging in those values:
\[
\text{Credit Utilization \%} = \left( \frac{500}{2000} \right) \times 100 = 25\%
\]
So, your credit utilization percentage is **25%**.
2. It is generally recommended to keep your credit utilization percentage below **30%**. Some financial experts even suggest targeting a utilization under **10%** for optimal credit scoring.
3. Keeping a credit card open, even if you don't plan to use it, can be beneficial for several reasons:
- **Credit History Length**: The length of your credit history is an important factor in your credit score. Closing an old credit card can shorten your average account age, which may negatively impact your score.
- **Credit Utilization**: By keeping the card open, you maintain a higher total credit limit, which can help keep your credit utilization percentage lower.
- **Emergency Access**: Having an additional credit source available can be helpful in case of emergencies.
- **Credit Mix**: Credit scoring models often favor a mix of different types of credit accounts (e.g., revolving credit like credit cards and installment loans). An unopened card contributes to that mix.
Closing a credit card can reduce your overall credit score if it adversely affects these factors.
\[
\text{Credit Utilization \%} = \left( \frac{\text{Credit Card Balance}}{\text{Credit Card Limit}} \right) \times 100
\]
In your case:
- Credit Card Balance: $500
- Credit Card Limit: $2,000
Plugging in those values:
\[
\text{Credit Utilization \%} = \left( \frac{500}{2000} \right) \times 100 = 25\%
\]
So, your credit utilization percentage is **25%**.
2. It is generally recommended to keep your credit utilization percentage below **30%**. Some financial experts even suggest targeting a utilization under **10%** for optimal credit scoring.
3. Keeping a credit card open, even if you don't plan to use it, can be beneficial for several reasons:
- **Credit History Length**: The length of your credit history is an important factor in your credit score. Closing an old credit card can shorten your average account age, which may negatively impact your score.
- **Credit Utilization**: By keeping the card open, you maintain a higher total credit limit, which can help keep your credit utilization percentage lower.
- **Emergency Access**: Having an additional credit source available can be helpful in case of emergencies.
- **Credit Mix**: Credit scoring models often favor a mix of different types of credit accounts (e.g., revolving credit like credit cards and installment loans). An unopened card contributes to that mix.
Closing a credit card can reduce your overall credit score if it adversely affects these factors.