Bill Rapp here with the Heartfelt and Hot in Houston Blog, and this is our newest segment: What is Credit Utilisation – And Why Does It Matter?

Have you ever come across the phrase ‘credit utilisation’ and wondered what it means? Even if you’ve never encountered it, it’s worth understanding how it works and the impact it can have on your credit rating. What is Credit Utilisation – And Why Does It Matter?

Your credit utilisation rate, or credit utilisation ratio, describes what percentage of your credit card credit limit (the maximum amount you can borrow) you are using. It is one of the factors that affects your credit score – and your score helps determine whether you will be accepted for credit-based products, and whether you’ll be offered the most competitive terms.

If your credit utilisation is low, lenders can see that you are only using a small amount of the credit available to you and may be more willing to lend to you as a result.

If your credit utilisation is high, on the other hand, lenders may believe that you are already heavily relying on credit and thus may be reluctant to let you borrow more.

You will find your credit limit on your credit card statement.

To calculate your credit utilisation rate, simply divide the amount you owe on your card by your credit limit and multiply the total by 100. Having your latest credit card statement to hand may help you with this.

To give you an example, if your credit card had a credit limit of £2,500 and your balance was £1,000, your credit utilisation would be 40% (£1,000 divided by £2,500 = 0.4 x 100 = 40).

Credit utilisation doesn’t just apply to single credit cards or accounts, however. You can also calculate how much of your total available credit limit you are using.

So if, for example, you had the above credit card with a limit of £2,500 and a balance of £1,000, but also a second credit card with a limit of £3,000 and a balance of £2,000, your overall credit utilisation would be 55% (total debt £3,000 divided by total credit limit £5,500 x 100 rounds out to 55%).

How does credit utilisation affect my credit score?

If your credit utilisation ratio is high, this can have a negative impact on your credit score. The reason for this is that, if you are using a lot of the credit available to you, lenders may believe you’re struggling financially and relying on credit to see you through.

Because of this, you may be viewed as high risk from a creditworthiness perspective and lenders may be less willing to let you borrow.

On the flipside, if you have access to funds you’re not actually using, this could suggest you are solvent, in control of your finances and do not have to rely on borrowing.

Bear in mind though – while your credit utilisation rate is important, lenders won’t use this on its own to decide whether or not to lend to you. Other factors, such as how well you’ve borrowed in the past, will also play a part.

What is a ‘good’ credit utilisation rate?

In an ideal world, it’s best to keep your credit utilisation rate under 30%. If this isn’t possible, aim for under 50%.

Anything above 50% may be flagged on your credit report, and above 75% certainly will be.

How can I lower my credit utilisation rate?

There are a number of steps you can take to lower your credit utilisation rate, such as:

Paying down debt

Perhaps the easiest way to lower your credit utilisation rate is to pay off some of your existing debt if you are able to. Once it’s paid off, you’ll need to remain disciplined and resist the temptation to start spending using credit again.

Clearing your debt more cheaply

You could also transfer some of your existing credit card debt to a 0% balance transfer credit card. This will enable you to avoid paying interest for several months and may help you pay off your debt more quickly. Be aware there will be a transfer fee to pay and you will ideally have cleared your debt before the 0% period ends and interest kicks in.

Not cancelling unused credit cards

If you have paid off your credit card balance in full and you don’t plan to use the card again, rather than closing your account, leaving it open can actually help lower your credit utilisation ratio.

However, it’s important to make sure you keep an eye on monthly statements for fraud and try not to spend on the card.

Asking for a higher credit limit

Alternatively, asking your provider to increase your credit limit will also help to lower your credit utilisation rate. Just make sure you don’t use this higher limit to go on a spending spree. Also, note that every time you ask for a credit limit increase this will be recorded on your credit report – so avoid asking too often. Certainly keep your requests to one or two per year at most.


The inspiration for today’s edition came from this original article:


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