University of Central Florida (UCF) ENT4412 Managing Small Business Finances Midterm Practice Exam

Maintaining high balances on credit cards can negatively affect a business's credit utilization rate because credit utilization is calculated by dividing the total amount of credit used by the total amount of credit available. When a business carries high balances on its credit cards, this results in a higher ratio of debt to available credit. Lenders typically view a higher credit utilization rate as a sign of higher risk, which can lower a business's credit score and make it harder to obtain financing or favorable interest rates in the future.

In contrast, lowering debt levels and regularly paying off credit cards would contribute to a healthier credit utilization rate because these actions decrease the amount of credit being used relative to what is available. Opening new credit accounts can also affect credit utilization, but typically in a way that may benefit the overall rate by increasing total available credit, as long as the balances are managed well.