What is credit utilisation?

Man in casual shirt paying with credit card online

If you’ve checked your credit report recently, you might have noticed that your credit utilisation has an impact on your credit score. To help you get a better idea of how credit utilisation works, we’ve put together this quick guide to getting it right.

What is credit utilisation?

Credit utilisation compares the amount of revolving credit you have available to you to how much of it you use per month.

For instance: suppose you have two credit cards. Your available credit would be the credit limits of those cards together. So, if your credit card limits are £3,000 and £1,500, the amount of revolving credit available to you would be £4,500.

This amount is then compared to the amount of credit you actually spend each month. Say you spent £1,000 on one card and £200 on the other. In turn, the credit referencing agency (the organisation that generates your credit report) then checks the total amount you spend. For this example, it is £1,200. In essence, they check £1200 against the total amount available.

In this scenario, the credit referencing agency would see that you’re using 27% of your available credit, and that would be recorded as your credit utilisation rate.

What is revolving credit?

Revolving credit is a line of credit that doesn’t have a fixed end date. Instead, the amount you owe carries over from month to month. The most common type of revolving credit is credit cards, however you can get other revolving credit models.

Revolving credit does not refer to borrowing such as loans or mortgages as these have fixed end date and you pay them off in regular instalments.

What is a good credit utilisation rate?

Most credit referencing agencies suggest that you keep your credit utilisation rate below 30%. This is because a credit utilisation rate of 30% or less is said to indicate that you’re good at managing your lines of credit and aren’t reliant on them from month to month.

Will a new credit card improve my credit score?

Yes, having a new credit card can improve your credit score. A new credit card will increase the amount of revolving credit available to you. By simply opening a new line of credit, your credit utilisation rate will fall and your score should improve over time.

It’s also worth noting that some credit referencing agencies take into account the credit utilisation rate of each credit card you own. So, if you have more than one credit card, it can be easier to keep their credit utilisation low by spreading your spending between them.

Just make sure you make at least the minimum monthly repayments on your credit cards, or even better paying them off in full each month. If you don’t make at least the minimum monthly repayment, you’ll damage your credit score.

Can closing a credit card harm my credit score?

Yes, closing a line of credit can have a negative impact on your credit score. This is because you’ll reduce the amount of credit available to you, affecting your credit utilisation ratio.

However, it is also important to weigh up whether closing a credit card would be beneficial to you in other ways, such as reducing the temptation to spend credit you can’t afford to repay or making it easier to keep track of your money.

Just make sure you fully understand the pros and cons closing a credit card before you go ahead – and remember, you need to ring your credit card provider to close your credit card, not simply cut it up.

Getting credit utilisation savvy can be an easy way of giving your credit score a boost. Want to see if you’re eligible for one of our credit cards? Check your eligibility now without harming your credit score.

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