What is credit card utilisation?

A happy woman using her credit card

When you want to borrow money, a lender will check your credit report to see how well you manage your debts as well as a number of other things.

Even though responsibly using a credit card can improve your credit score, maxing out your credit cards can actually have the opposite effect.

In this guide, we explain the meaning of credit card utilisation, how it can impact your credit rating and how you can go about managing your utilisation sensibly.

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What is credit card utilisation?

Credit card utilisation is the percentage amount of credit you can utilise (use) from the available limit you have to spend on your credit card.

For example, if your credit card limit is £2,000 and you spend £1,000 one month, your credit card utilisation rate will be 50% for that month, as you have only spent half of the full amount of money you are entitled to borrow.

A lender will look at your credit card utilisation rate (among other factors) to assess whether they should lend you money. The lower your credit card utilisation rate, the better. A low rate proves to a lender that despite having access to a lot more credit, you’re controlled and disciplined enough not to use all of it and get yourself into large amounts of debt.

Because a low credit utilisation rate makes you look like an incredibly responsible borrower to a lender, a low rate can mean that an application for a personal loan, mortgage or car finance has a much higher chance of approval.

On the other hand, if you are near your credit card limit and have a high utilisation rate, this will have a negative impact on your credit rating and could flag you up as high risk to other lenders, so they will be less inclined to let you borrow from them. Any high risks will either result in your credit application being declined or you may be offered a deal but with higher interest rates.

If you have more than one credit card then your utilisation rate will be calculated on the collective limits and amount of money borrowed.

For example, if you have one credit card with a limit of £1,000 you have spent £200 on, a second with a limit of £2,000 you have spent £700 on, then collectively you will have a credit utilisation rate of 30%.

What is a good credit utilisation rate?

Although there is no set criteria and it is not known for certain what lenders deem as “good”, a favourable credit utilisation rate in the UK is typically considered to be around 30%. Keeping to a low utilisation rate of 30% is a good way to build a credit score, but it would be even better for you if you kept it lower than that (ideally, between 20% and 25%).

How does credit utilisation affect your credit score?

If you max out your credit card(s) and borrow/spend most of the available credit, this will have a negative impact on your credit score.

According to Equifax, if you utilise between 50% and 75% of your credit, this is an ‘amber flag’ to lenders, and if you utilise 75% of your limit, this is a ‘red flag’ - both could negatively impact your credit score.

How to manage your credit utilisation sensibly

To responsibly control your credit utilisation, you should:

  • Set up a direct debit to pay off your credit card balance in full or at least the minimum payment and a percentage of your balance, every single month.
  • Avoid using more than 30% of your credit card limit.
  • If you start to use more than 30%, apply to increase your credit card limit if possible or reduce your spending where you can.
  • If you can’t get your credit limit increased, apply for another credit card or a personal loan to reduce your credit card debt. Paying off your debt with savings would be better, though - if you have any.
  • Avoid closing credit card accounts with a nil balance - the more credit you have available and unused, the better.
  • Check your credit score and fileregularly to keep an eye on how much of your credit you’re using and how this may be affecting your score.

So now you know how to improve your credit utilisation, why not take a look at our related guide 12 ways to improve your credit score for invaluable tips and tricks on how you can boost your credit score to improve your chances of borrowing money.

Alternatively, check your score now by tapping the button below or read our other related guide for more information and handy tips.

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