What Is Credit Utilisation?

It's important to understand how credit utilisation works and how it affects your credit score. It's a crucial factor in making the best possible financial decisions. 

Credit utilisation explained

The amount of revolving credit you have available versus how much of it you use per month is what credit utilisation is all about. Most credit reference agencies recommend that you keep your credit utilisation below 30%.

This percentage margin means that you are good at managing your finances and keeping your credit utilisation ratio at 30% or less. Not being reliant on your available credit from month to month shows that you are capable of managing your available credit sufficiently. 

Your credit utilisation ratio is not just based on one card or credit amount. It is based on the total credit limit you have available.

Example: If you have three credit limits available to you, £500, £2,000 and £2,500, the total available credit limit is £5,000. If you only use a total of £1,000 across all three available credits, your credit utilisation ratio would be 20%.

What is a good credit utilisation ratio?

The amount of credit you use will directly impact your credit utilisation score. There are some rough guidelines, based on Equifax, that you can follow to see what a ‘good’ amount to use is:

• Over 75% - Using more than 75% of your credit will show up as a red flag on your credit report.

• 50% to 75% - This can be seen as a warning that you are using more than half of your available credit. It might not be as bad as a red flag but it can still be seen as negative.

• Under 30% - Some credit agencies will see 20% and further down as a positive. It is a good strategy to try and keep your credit under 30%.

Lenders will always look at how you use your credit to see if you are a responsible borrower or not. However, a 0% credit utilisation ratio might not always mean the perfect credit score.

Using your credit in a responsible way will assist by showing that you have a good credit history and are able to work with your finances. 

Can my credit utilisation be lowered?

The fastest and easiest way would be to pay your existing debt. Sometimes it is not that easy to do straight away. You can always look at reducing the cost of your borrowing by transferring some of your debt to a 0% balance transfer card.

This can give you breathing space for a period to pay off your debt. Here are some tips to help you lower your credit utilisation:

• Try to make payments more than once a month - Your credit provider has to report your credit activity to the credit reference agencies once a month and by making more regular payments you will ensure that your balance never gets too high. By paying off a portion of your bill before the pay-by date you can lower your credit utilisation.

• Charges should be spread over multiple cards every month - If you have three cards, try to spread your charges over all three accounts rather than have one account with high utilisation. This will create a lower utilisation over more than one account. Do keep in mind that this will not always work as certain credit scoring models will look at the combined credit amount.. 

By using your cards and paying them in full each month lenders are still able to see that you can manage your money effectively. 

Can my credit score be harmed by closing a credit card?

Your credit utilisation ratio will be negatively affected when closing a line of credit as you will then be decreasing the amount of credit available to you. This will directly have a negative impact on your credit scores. 

It might be better to carefully go over the options of whether or not to close a credit card as it can be beneficial in other ways. Ensure that you completely understand the pros and cons when closing a credit card ahead of time.

You cannot simply cut up a credit card as you will need to contact the credit provider when you are wanting to close the account. 

It might be easier to reduce the temptation of spending credit when you cannot afford repayments. You can be more strict regarding your available credit and spending, but getting utilisation canny is the best way to boost your credit rating.

It is highly recommended to try and keep your credit utilisation below 25% as lenders also care about the amount of your available credit.

When paying your credit card balance in full monthly, using your card for small items is enough to show activity taking place and this all goes towards your credit history.

It is not necessary to carry over a credit card balance or pay interest to show your credit utilisation.