Question

question 5
you have a credit limit of $10000 and a balance of $3400. youre planning on applying for a car loan soon. what should you do to improve your fico score using credit utilization?
pay $500 to reduce the utilization ratio.
close your credit card.
keep the balance as is since its under 40%.
charge another $600 for new tires.

Explanation:

Step1: Calculate current utilization ratio

The credit utilization ratio is calculated as (balance / credit limit) 100. So, ($3400 / $10000) 100 = 34%. But we want to improve the FICO score, so reducing the utilization ratio is good. Let's analyze each option:

• Option 1: Pay $500 to reduce the balance. New balance = $3400 - $500 = $2900. New utilization ratio = ($2900 / $10000) * 100 = 29%, which is lower, so this helps improve the score.
• Option 2: Closing the credit card would reduce the available credit (since the card is closed, credit limit becomes 0 for that card, but if it's the only card, utilization ratio would be undefined or 100% which is bad). So this is bad.
• Option 3: Keeping the balance as is: utilization is 34%, but paying down to lower it is better for FICO (lower utilization is better, ideally below 30%). So this is not the best.
• Option 4: Charging another $600: new balance = $3400 + $600 = $4000. Utilization ratio = ($4000 / $10000) * 100 = 40%, which is higher than current 34%, so this worsens the ratio.

Step2: Determine the best option

From the analysis, paying $500 to reduce the utilization ratio (Option 1) is the best action to improve the FICO score via credit utilization.

Answer:

A. Pay $500 to reduce the utilization ratio.