Credit utilisation plays a crucial role in determining your credit score, yet many people don’t fully understand its impact. This metric reflects how much of your available credit you're using and can significantly affect your creditworthiness. Here’s an overview of what credit utilisation is, why it matters, and how to manage it effectively.
Credit utilisation is the ratio of your current credit card balances to your total credit limits. It is expressed as a percentage and is a key factor in your credit score, typically accounting for about 30% of the total calculation. For example, if you have a credit limit of £1,000 and your balance is £300, your credit utilisation is 30%.
Credit utilisation matters because it indicates to lenders how much of your available credit you’re using. High credit utilisation suggests that you may be over-relying on credit, which can be a red flag for lenders. A lower ratio demonstrates that you’re using credit responsibly and not overextending yourself.
Higher credit utilisation can lower your credit score, as it may signal financial strain. Conversely, a lower credit utilisation ratio can positively impact your score by showing that you manage credit effectively and are less of a risk to lenders.
Lenders view a high credit utilisation ratio as a sign that you might be living beyond your means or struggling with debt. This could make you a less attractive candidate for new credit (like a house loan), higher limits, or favourable interest rates.
The general guideline is to keep your credit utilisation below 30%. This means if you have a total credit limit of £1,000, aim to maintain a balance of £300 or less. Maintaining this ratio helps demonstrate to lenders that you are managing your credit well.
For optimal results, some experts recommend aiming for a ratio below 10%. This indicates an excellent level of credit management and can further enhance your credit score.
Set up automatic payments or reminders
These can help you stay on top of your credit card balances and due dates. This can prevent you from inadvertently increasing your utilisation ratio. Looking for an app that does exactly that? Incredible reminds you and pays all your credit cards automatically every month based on your preferences.
Pay down balances
Regularly paying down your credit card balances can help reduce your credit utilisation ratio. Aim to pay off your cards in full each month to avoid high utilisation and interest charges.
Increase your credit limits
Requesting a credit limit increase can lower your credit utilisation ratio, provided you don’t increase your spending. A higher limit with the same balance means a lower utilisation percentage.
Spread out your spending
If you have multiple credit cards, consider spreading your spending across them rather than maxing out a single card. This can help keep the utilisation ratio lower on each card.
Monitor your credit regularly
Keep an eye on your credit report and utilisation ratio. Regular monitoring helps you stay aware of your credit usage and make adjustments as needed.
Avoid unnecessary new applications
Each new credit application can impact your credit score and potentially affect your credit utilisation ratio. Apply for new credit sparingly and only when necessary. Learn more about the impacts of hard and soft credit checks here.
Credit utilisation is a critical factor in your credit score, reflecting how responsibly you manage your available credit. Keeping your utilisation below 30% – ideally under 10% – can positively impact your score and make you a more attractive candidate for credit. By paying down balances, increasing credit limits, and monitoring your credit usage, you can effectively manage your credit utilisation and improve your overall credit health.
