What does your credit utilisation rate mean?

What is credit utilisation?

Credit utilisation is the term used to describe how much of your available credit you’re using.

It’s an important factor that impacts your credit score with credit reference agencies (CRAs) such as Equifax, Experian and TransUnion.

Your credit utilisation rate, or credit utilisation ratio, is calculated based on your ‘revolving credit’. This is a term used to describe credit lines with no set end date. For example, a credit card is an ongoing open line of credit, whereas a loan or mortgage has a set term so won't be factored in.

A low credit utilisation rate indicates to lenders that you’re a trustworthy borrower, as you're not spending as much as you could. Keeping your rate low can be particularly important if you’re applying for a mortgage, loan or car finance – not only can it improve your chances of being accepted, but it can also mean lower interest rates.

How do I find out my credit utilisation rate?

To work out your credit utilisation rate, look at your credit card statements and add up the balances. Divide your current credit card debt by your available credit limit then multiply it by 100.

For example:

• Credit card limit: £2,000

• Your current balance (how much you owe): £1,500

• 1,500 divided by 2,000 = 0.75

• 0.75 multiplied by 100 = 75%.

Bear in mind that if you have more than one credit card, the utilisation rate is taken from the total amount of credit available to you (and your total balance) across all the cards.

What is a good credit utilisation ratio?

It’s generally recommended that you stay below a 30% credit utilisation rate. It’s not an exact science as your likelihood of being accepted for credit is based on more than just your credit utilisation rate. But if you go over 50%, it could have a negative impact on your credit score.

So, if you’ve just taken out a new credit card, try to keep the amount of credit you’re using as low as you realistically can, and avoid using the total available credit card balance.

What our expert says...

"Credit utilisation matters because it gives a sense of how much of someone’s available borrowing is already in use, which can shape how they look on paper. Even when payments are being made, a high ratio can suggest tighter finances than people realise, which is why it’s worth keeping an eye on rather than leaving it to chance."

Sajni Shah, Personal finance expert

How can I improve my credit utilisation rate?

If you’re aiming to get under that 30% ratio, there are several things you can do:

• Pay off outstanding balances – an obvious one, but reducing your credit debt will improve your credit utilisation ratio, as it will free up the amount of credit available to you. Even if you can’t pay the full amount, bringing the balance down should help.

• Apply for a credit limit increase – if you’re eligible to apply for a higher credit limit, this will lower your credit utilisation ratio without you having to pay off any additional debt. But bear in mind, applying to increase your credit limit can temporarily dent your credit score.

• Think carefully before closing credit cards – cancelling unused credit cards may actually increase your credit utilisation rate as you’ll have less spare credit available to you. However, there are other reasons for cancelling unused cards. If you’re going to cancel a card, make sure it’s not offering a better rate of interest than the ones you’re keeping.

You should think carefully before taking on an increased total credit limit. While it may improve your credit utilisation ratio, the risk of getting into further total debt is a real one, so it’s always best to simply pay off any outstanding debts, if possible. Keep your future credit spending low and pay off the total balance in full each month.

Your credit utilisation rate will usually be updated at the end of each monthly billing cycle.