Your credit utilisation rate, or ratio as it’s sometimes known, compares the amount of credit you have available to how much you use.
So, if you use more of the credit available to you, for example, buying a holding on a credit card, this will cause your credit utilisation rate to increase. On the other hand, if you pay off debt, your credit utilisation rate will decrease.
Credit utilisation is one of the most important factors for determining your credit score, so if that’s something you’re looking to improve, you need to understand how it all works.
How does credit utilisation affect my credit score?
So, as we know – the credit utilisation rate shows the percentage of your credit limit you’re currently using.
Let’s look at an example.
|credit card with a limit of £3,000 and your balance is £600||Your credit utilisation rate would be 30%|
|another £900 on the same card and it will take your used balance up to £1,500||Your credit utilisation rate would also be 50%|
If you have a credit card with a limit of £3,000 and your balance is £600 – your credit utilisation rate would be 30%.
Spend another £900 on the same card and it will take your used balance up to £1,500. Your credit utilisation rate would also go up to 50%, as you are using half of the credit that’s available to you.
So how does this affect your credit score?
In a nutshell, credit scoring looks favourably on a low utilisation rate. The higher your credit utilisation rate is, the more points will be deducted from your score.
According to Equifax, which is one of three credit reference agencies in the UK, if you use between 50% – 75% of your credit limit, this will show up as an ‘amber flag’ on your report, and may have an effect on your credit score.
Use over 75% of your credit and it’s classed as a ‘red flag’ and will almost undoubtedly have a negative effect on your score.
What counts towards your credit utilisation?
Your credit score looks at both the credit utilisation on individual accounts and your credit utilisation as a whole across all your accounts.
So while you may only have a utilisation rate of 10% on one card, if the rate is 80% across all of your accounts, your score will be affected.
One thing to bear in mind, though, is that credit utilisation only comes into play with revolving credit. This is a type of credit that has no set end date, like a credit card.
Mortgages or car finance would not count towards your credit utilisation, as you pay these off to a fixed end.
Why is having a high credit utilisation rate bad?
When your credit utilisation rate is high, it has a negative impact on your credit score. Basically, this is because if you’re using a lot of the credit that’s available to you, it’s deemed you’re relying on credit too much. It can even be an indicator that you’re struggling financially.
All of this adds up to suggest you’re a higher risk to lend to. On the other hand, if you have a low credit utilisation rate, it suggests – although you have funds – you do not need to use them and are therefore more in control of your finances.
What is a ‘good’ credit utilisation rate?
Keeping your credit utilisation rate under 20% or 30% is a good tactic if you want to improve your credit score. However, as a first step, try to get it down under 50%, as anything above this may be more likely to be flagged on your report.
The other thing to bear in mind is that your credit score works off your history of credit. So if your credit utilisation is consistently 0% and you don’t use your cards at all, there’s nothing to show you’re responsible when borrowing and, ironically, that can give you a bad score, too.
Four tips for managing your credit utilisation
Four Tips To Help
- Pay Down Your Debt
- Don’t Cancel Your Cards
Four Tips To Help
- Transfer Your Balance
- Request A Higher Credit Limit
If you have a high credit utilisation rate, don’t worry – all is not lost. There are plenty of ways you can manage this and get your score back into shape.
Pay down your debt
This is the most sensible option. If you can pay off more of your existing debt than just the minimum, your credit utilisation rate should drop, giving you a better score.
Read: How Do I Find My Debts & Who I Owe Money To
Don’t cancel your cards
It seems counterintuitive, but leaving your unused credit cards open can actually help your credit score.
By closing your account, you’ll lower the amount of credit available to you and this may affect your credit utilisation rate negatively – particularly with cards that have a high credit limit.
Transfer your balance
If you’re struggling to pay down your debt, shop around to find the best interest rate you can and transfer the balance.
Ideally, a 0% balance transfer card will give you some breathing space and help you pay off your debt quicker.
Make sure it’s all paid off before the promotional rate ends, though, or you could see the interest rate, and your repayments, rocket.
Request a higher credit limit
If you feel confident that you won’t be tempted to spend more, you could ask your credit provider to raise your limit. This will automatically lower your credit utilisation rate.
Remember, asking for more credit will be noted on your credit report too, though, so try and limit the number of times you request this.
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