What is credit card utilisation?

How is a credit card utilisation rate calculated?

Here’s how lenders calculate credit card utilisation rates.

• The credit utilisation rate is calculated by dividing the total outstanding balance on credit cards by their total credit limit, then multiplying by 100 to get a percentage.

• For example, a total credit card limit of £10,000 and a balance of £2,500 means a credit utilisation rate of 25%. The maths looks like this: (2,500 / 10,000) x 100 = 25%.

Consumers have zero control over how credit card utilisation rates are calculated, but they can manage how they use credit for purchases.

What is a good credit card utilisation rate?

Staying on top of credit card use may help people achieve positive credit card utilisation rates. Generally, credit card utilisation falls into two categories:

• Acceptable. A credit utilisation rate of 30% or less is typically considered good. This suggests responsible credit management. Achieving 10%-20% may be beneficial for more desirable credit scores.

• Concerning. A high utilisation rate, typically particularly above 30%, may signal to lenders that a consumer is over-reliant on credit. This may lead to a negative impact on credit assessments and make it more difficult to receive loan approvals.

In short, having a low credit card utilisation rate is important for a healthy credit profile.

How does credit card utilisation affect credit ratings?

Credit card utilisation rates can contribute to how lenders weigh up potential borrowers in three areas:

• Credit score. Keeping a utilisation rate low, ideally below 30%, may improve a credit score. Higher rates may decrease it and reflect potential financial stress or mismanagement. Not all lenders use credit scores in their decision-making.

• Borrowing power. A credit reference agency (or credit bureaus, to use another financial term) may closely monitor credit card utilisation rates to determine credit scores. Agencies review the rate to assess someone’s borrowing and spending.

• Lender choice. Different lenders have different ways of assessing borrowing power. Some may weigh credit card utilisation when evaluating loan applications, including mortgages, as it indicates the borrower’s dependency on credit.

Understanding and managing credit card utilisation rates may aid financial flexibility and a borrower’s likelihood of approval for future loans.

How to manage a credit card utilisation rate

Here are some potential steps borrowers can take to keep credit card utilisation rates low:

• Pay off balances in full each month to avoid accruing interest.

• Request higher limits or spread balances across existing cards to dilute credit usage.

• Avoid taking on unmanageable debt that may negatively affect a credit score.

• Consider the effect on total available credit before closing any credit card accounts.

Keep in mind that reducing credit limits may inadvertently increase the utilisation rate.

What else is important about credit card utilisation rates?

Understanding and effectively managing credit card use is important. Regularly monitoring one's credit utilisation rate can help it remain low, positively influencing a credit score. Ultimately, creditworthiness is what lenders and credit card issuers like to see when reviewing an application.

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