Credit utilization is your credit card balances divided by your credit limits, expressed as a percentage. A $2,000 balance on a card with a $10,000 limit is 20% utilization. It is calculated both per card and across all cards, and it is the second-largest factor in a FICO score, worth about 30% of the total.
Lower is better. Scores tend to be strongest below 10% and start dropping noticeably above 30%. Above 50% is a warning sign to lenders, and a maxed-out card can cost dozens of points even if every payment is on time.
The detail people miss is timing. The number reported to credit bureaus is usually the balance on your statement date, not what you owe after paying the bill. Someone who charges $4,000 a month on a $5,000-limit card and pays in full every time still shows 80% utilization on their report, because the statement closes before the payment. Paying most of the balance a few days before the statement date fixes it.
Utilization has no memory. Once a lower balance is reported, the score recovers within a cycle, which makes it the fastest lever to pull before applying for a mortgage or car loan. Raising a credit limit also lowers the ratio without changing spending.
The common mistake is closing an old card to simplify, which removes its limit from the denominator and pushes utilization up on everything else.