What’s the best level of credit utilisation?

There’s a good chance you’ve never heard of credit utilisation. But it could have a huge bearing on whether or not you’re offered finance, such as mortgages, loans or credit cards. Here’s what you need to know about credit utilisation – and what ratio you should be aiming for.

Written by

Alex Hasty

Insurance and finance expert

Posted

21 JANUARY 2022

3 min read

What is credit utilisation?

In simple terms, your credit utilisation is the proportion of credit available to you that you use. In other words, if your credit card has a £2,000 limit and you spend £500 on it, you’ll be using a quarter of your available funds. That means you’ll have a credit utilisation ratio of 25%. However, credit utilisation applies to all the credit available to you, not just a single credit card.

What’s the best credit utilisation ratio to have?

In an ideal world, you’d keep your credit utilisation ratio below 30%. This shows potential lenders that you’re in control of your finances and likely to pay your debts on time, making them more likely to accept you for finance and offer you better interest rates.

If your credit utilisation ratio goes above 50%, it could be flagged on your credit score. This might make it harder to get a loan or mortgage.

How much credit should I use?

As much as you need to use, depending on your circumstances at the time.

How can I reduce my credit utilisation rate?

If your credit utilisation rate is too high – that’s to say, you’re spending close to, or equal to, your available credit limit – you should take steps to reduce it.

But what’s the best way to do that? There’s a few things you could try:

The most obvious way is to reduce your credit card spending and use cash or a debit card for purchases.
Pay down your debt by switching to a card that offers 0% on balance transfers. Remember that there may be a fee for switching and you’ll need to make at least the minimum repayments or you’ll lose the 0% benefit.
Although it may seem counter-intuitive, it might be wise to avoid closing credit cards. Closing cards will increase the amount of credit available to you that you’re using. On the other hand, if you have multiple credit cards open, you have the potential to overspend and rack up a significant amount of debt.
Consolidate your debt with a debt consolidation loan. Be aware, though, that while you’ll only have one loan repayment to make each month, extending the length of the loan means you may end up paying more overall.

How can I check my credit utilisation?

It’s easy to calculate your credit utilisation score yourself. Simply add up the outstanding balances on all the credit cards you have. Then divide this by your total credit limit. Multiply the result by 100 and you have your score.

What’s the 30% rule?

Some people argue that you should never have a credit utilisation rate over 30%. Certainly, the people with the best credit ratings tend to keep their credit utilisation low.

The moral of the story is: if you get a credit card, don’t max it out. Apart from leaving you in debt, this could also harm your chances of getting finance in future.

Will closing down old credit cards increase my credit utilisation?

If you cancel a credit card you don’t use, there’s a possibility it could actually damage your credit score. This is because it will reduce the amount of credit available to you. That will, in turn, increase your credit utilisation ratio (because you’ll be using a bigger proportion of your available balance). However, having lots of credit cards open can also act as a red flag to lenders, as there’s the risk of you being tempted to spend on them and get into serious debt.

Frequently asked questions

Where do I find my credit limit?

You’ll find your credit limit on your credit card statement. You should also be able to find it by logging into your credit card account online.

How important is my credit utilisation score?

Your credit utilisation is something lenders consider when deciding whether to offer you finance. But it isn’t the only thing. They’ll also take into account other factors, including how reliable a borrower you’ve been in the past.

Can getting a loan help my credit utilisation score?

If you have a large credit card debt, it may help your credit utilisation score to pay it off with a debt consolidation loan. You may also find this offers you a better interest rate than a credit card, although extending the length of your loan means you may end up paying more overall.

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