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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...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. **Credit Utilization Percentage**: Credit utilization is calculated by dividing your credit card balance by your credit limit, then multiplying by 100 to get a percentage.
\[
\text{Credit Utilization \%} = \left(\frac{\text{Balance}}{\text{Credit Limit}} \right) \times 100
\]
In this case:
\[
\text{Credit Utilization \%} = \left(\frac{500}{2000}\right) \times 100 = 25\%
\]
Therefore, your credit utilization percentage is **25%**.
2. **Recommended Credit Utilization Percentage**: Financial experts generally recommend keeping your credit utilization below **30%**. Some even suggest aiming for below **10%** for optimal credit score impact.
3. **Reasons Not to Close a Paid-off Credit Card**:
- **Credit History Length**: Closing a credit card can shorten your overall credit history, especially if it's an old account, which can negatively impact your credit score.
- **Credit Utilization Ratio**: Keeping the card open, even with a $0 balance, helps maintain a lower credit utilization ratio because it increases your total available credit.
- **Credit Mix**: Having a variety of credit types (credit cards, installment loans, etc.) can positively affect your credit score, and keeping the card open contributes to that mix.
- **Potential Emergency Use**: You may want the card available in case of emergencies, even if you don’t plan to use it regularly.
By maintaining the account, you can preserve your credit score and overall credit profile.
\[
\text{Credit Utilization \%} = \left(\frac{\text{Balance}}{\text{Credit Limit}} \right) \times 100
\]
In this case:
\[
\text{Credit Utilization \%} = \left(\frac{500}{2000}\right) \times 100 = 25\%
\]
Therefore, your credit utilization percentage is **25%**.
2. **Recommended Credit Utilization Percentage**: Financial experts generally recommend keeping your credit utilization below **30%**. Some even suggest aiming for below **10%** for optimal credit score impact.
3. **Reasons Not to Close a Paid-off Credit Card**:
- **Credit History Length**: Closing a credit card can shorten your overall credit history, especially if it's an old account, which can negatively impact your credit score.
- **Credit Utilization Ratio**: Keeping the card open, even with a $0 balance, helps maintain a lower credit utilization ratio because it increases your total available credit.
- **Credit Mix**: Having a variety of credit types (credit cards, installment loans, etc.) can positively affect your credit score, and keeping the card open contributes to that mix.
- **Potential Emergency Use**: You may want the card available in case of emergencies, even if you don’t plan to use it regularly.
By maintaining the account, you can preserve your credit score and overall credit profile.