What is a credit card utilisation rate?

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Since January 2021, there have been 62.8 million credit cards issued to UK residents. If used little and often and repaid in full each month, credit cards can help spread out expenses each month and build up your credit score.

However, simply making at least the minimum monthly repayment each month isn’t the best way to give your credit score a boost – there are other tricks you can use too. 

If you own one or more credit cards, getting to know the ins and outs of credit utilisation rates is key. So, what is credit card utilisation? We’ve put together a brief guide to help you get up to speed.

Defining credit card utilisation

We ask once again: what is credit card utilisation exactly?

Credit card utilisation refers to the percentage of a borrower’s total available credit that is being utilised. Basically, it’s the amount of your available credit limit you use each month.

This ratio is used by credit reporting agencies to help calculate a credit score.

A low ratio (i.e. you only use a small percentage of the credit available to you) can have a good effect on your credit score. You can figure out this ratio by using a credit utilisation calculator or working with a credit monitoring service.

What is a good credit card utilisation rate?

With a credit card, you have access to a line of revolving credit. This means that you have a set credit limit available to you that you can spend up to, then once you repay it, it’s available to you again. 

When spending on your card, it’s important to keep this level below 30% if possible. Anything below 30% usage is considered a good credit card utilisation.

To calculate your credit utilisation ratio, tally up your credit cards then follow these steps:

  1. Add up the outstanding balances;
  2. Add up the credit limits;
  3. Divide total balances by total credit limit;
  4. Multiply by 100.

The last step is important if you want to see your credit utilisation ratio as a percentage.

If you opt for weekly or monthly updates on your credit score, you’ll often be provided with your credit utilisation ratio in the report.

What does it mean?

Credit utilisation ratios primarily focus on a borrower’s revolving credit. The calculation represents the total debt that borrowers utilise compared to their full revolving credit total.

The total is based on how much a borrower has been approved for by credit issuers. So, if you have multiple credit cards, it’s your total credit limit across all of them, not just individually.

To better manage credit balances, get to know your current debt-to-income ratio. This ratio refers to both non-revolving credit and revolving credit. It’s another factor creditors use to assess eligibility when someone submits a credit application.

What should I keep my credit card utilisation rate at?

Keep your credit card utilisation rate below 30%. This is the recommended percentage by credit suppliers. The percentage in question is based on all of your credit cards combined.

If you have three credit cards, for example, their total credit utilisation rate should be below 30%. Let’s go over an example of the calculation to help you further understand.

Say a borrower has three credit cards each with a different balance and credit limit.

  • Credit card 1: Credit line £3,000, balance £500.
  • Credit card 2: Credit line £5,000, balance £1,500.
  • Credit card 3: Credit line £10,000, balance £3,000.

The total revolving credit for all three cards is £18,000:

  • £3,000 + £5,000 + £10,000 = £18,000.

The total credit used is £5,000:

  • £500 + £1,500 + £3,000 = £5,000.

The credit utilisation ratio is 5,000 divided by 18,000. When you multiply the amount by 100, you get the credit utilisation as a percentage, which is 27.7%.

In this case, you would be slightly under 30% utilisation, which is considered a good rate.

Does credit utilisation improve credit?

Creditors rank your credit score partially based on your credit utilisation ratio. It represents 30% of your ranking by creditors.

If you have high credit utilisation, your score will take a hit. To improve your credit score, you need to lower your credit utilisation rate.

If you pay your minimum balance or more than the minimum balance on time each month, you can slowly improve your credit score if your credit utilisation rate is low enough.

It’s not necessarily good to have zero credit utilisation because you aren’t demonstrating that you can borrow and repay credit each month. At the same time, it probably won’t hurt your score either.

Credit cards vs small amount loans

The difference between credit cards and small amount loans is that loans provide a lump sum of money that you pay back each month until you have no balance leftover.

Credit cards provide you with a line of credit and a revolving balance based on how much you spend.

Scenarios where it may be best to use a personal loan instead of a credit card include:

  • If you qualify for a lower APR.
  • Plus, if you want to consolidate high-interest debts.
  • If you need to finance a large, one-time expense.
  • Finally, if you can make monthly payments throughout the loan term.

Even if you have a small amount loan, paying off the expenses could take longer than paying expenses through a credit card. If you want to finance smaller expenses and repay the entire debt within a month, credit cards are often better as you won’t pay any interest on your spending.

For regular spending, try to find a credit card with a 0% interest promotion offer or one without yearly fees. There are also reward credit cards that match your spending for the first year in the form of credits.

Just remember that with a 0% purchase card, once the 0% period ends, the card’s usual rate will apply. 

How to improve your credit utilisation ratio

There are a few different ways you can improve your credit utilisation rate. Try these methods if  you have a high credit utilisation ratio:

  • Pay down debts – this will reduce your debt-to-income ratio and your utilisation rate.
  • Get under the 30% utilisation mark – as covered above, this has a big impact on your credit score.
  • Ask for a higher credit limit – if you’re not already at your card’s maximum credit limit, you could ask your card provider for a higher credit limit if you’ve got a good history of making your repayments.
  • Open a new credit card – adding a new credit card to your portfolio will increase the amount of credit available to you and bring down your credit utilisation ratio.

Just bear in mind that you should only take out a new credit card or increase your credit limit if you are confident that this won’t get you into debt. Try to only spend small amounts on your card and repay them in full each month.

Building up credit takes time, but you can start by improving your credit utilisation ratio. The best way to improve this rate is by paying off your debts on time.

Credit utilisation in the UK: what you should know

What is credit utilisation and why should you care about it? Credit utilisation is the percentage of credit that a borrower is utilising. It can have a major impact on your credit score.

Credit utilisation in the UK can positively impact your credit score if you pay your debts on time and keep your spending below 30%.

Because there are so many credit card options out there, it can be hard to choose a credit card that matches your needs. We make it easy for you. Compare credit cards now to find the one that’s right for you.

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