Which credit utilization rate would be preferable to a lender on a credit card application?
A. 43.0%
B. 27.5%
C. 83.0%
D. 76.3%
Answer: B. 27.5%
The credit utilization rate is 27. 5% as this would be the most preferable for a lender on the credit card application. Credit utilization which is a comparison of the amount of credit a user is currently utilizing where credit utilization is defined as the total credit limits of active credit card accounts divided by the total amount of credit currently being used is very important in determining creditworthiness. In general, the utilization rates are preferred to be less since it signifies better credit management, and, therefore, low risk.
A rate of 27. 5% lies within the range that the majority of the financial gurus suggest, which stands at below 30%. For instance, if you currently have a credit card that has a maximum credit limit of $ 10,000 and your balance stands at $2,750 then your credit utilization rate shall be 27. 5%. This means that you are using credit, though not excessive credit, and therefore you are using credit smartly. On the other hand, the other percentages (43%, 83%, and 76. 3%) are regarded as high and can easily attract the attention of the lenders. Commonly, high utilization levels can point towards the fact that the firm financially over-extended itself and is perhaps relying too much on credit lines, which can mean a higher risk of default. For instance, with an 83% credit utilization of $8,300 of debt out of the $10,000 limit lenders will be concerned about your ability to handle more credit more responsibly. It is important to note that although 27. 5% is quite fine, that is why significantly lower rates (up to 10-20%) can be even more effective. Still, choosing the beneficial personnel option out of the proposed ones is 27. 5%, which has the highest appeal to lenders, is indicative of an appropriate usage of credit together with a measurable line of credit.
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