Credit utilisation… sounds pretty dull, right? But knowing how it works could help you boost your credit rating.
If you’re wondering why your credit score is on the low side, it could be down to your credit utilisation. We’re here to explain the ins and outs of how your spending can affect your credit rating.
So… what is it?
The clue is actually in the name. Credit utilisation refers to how much credit we use, or rather, ‘utilise’. The amount of credit we use is measured against how much credit we have available to us.
So, if you have two credit cards on the go and they both have a limit of £1,500, the amount of credit available to you is £3,000. If you maxed one card to its full limit but left the other one untouched, you’d be using half of your available credit. This would mean your credit utilisation is 50% – got it?
Why is high credit utilisation bad?
Having a high credit utilisation rate can send warning signals to potential lenders. Even if you only have a small credit limit, using up lots of it can be seen as a bit of a credit blunder.
This is because it can paint a negative picture of your relationship with credit. Tearing through your credit limit could mean you’re relying on credit a bit too much, which can scare off future lenders. It can also give the impression you’re not totally in control of your finances, which again, can be a bit of a red flag.
This doesn’t mean you have to cut up all of your cards in a panic. In fact, lenders like to see you using credit on a regular basis – just as long as you’re not going overboard.
What credit utilisation should I have?
While there’s no magic number, credit reference agencies typically hint that 30% is a good figure. So, if you have a credit limit of £1,500, you’d be aiming to spend no more than £450 to keep a healthy credit utilisation.
How can I keep my credit utilisation low?
Hold onto old credit cards
Whether it’s an old credit card gathering dust or a long-forgotten store card, keeping the account open can have its benefits.
You might think it’s a silly idea if you’re no longer using it, but it’ll mean your available credit limit will stay high. And if the card carries a non-existent or low balance, it will help you keep your overall credit utilisation low – as you’re not using up all of your available credit. Simple!
Keep an eye on your spending
It might sound obvious, but keeping a close eye on your credit utilisation could stop you from going overboard.
Checking your spending on a regular basis could help you stay under a reasonable limit. You could even set up spending alerts or texts on the bank’s app to give you that extra nudge.
Think about a personal loan instead
When it comes to credit utilisation, personal loans don’t come into the equation. This is because credit utilisation is all about ‘revolving’ credit, where the payments are controlled by the customer instead of the bank.
So if you’re looking to borrow a sum of money to cover a bigger purchase, it might make more sense to think about a personal loan. That way, you can borrow all of the money you need in one go without worrying about using too much credit.
Plus, if you’ve got multiple credit card debts, you could lump them all together and pay them off with a loan. Then, you’d only need to make one payment a month – and your credit utilisation would drop nicely, too.
See if you can increase your credit limit
Keeping a low credit utilisation is easier said than done if you’ve got a small credit limit. If you’ve got a low limit, making a few purchases with your credit card could make your credit utilisation rocket without spending much at all.
Credit companies often offer to increase your credit limit after a few months of responsible borrowing. If you’ve been making your payments on time and in full for a while, you could check if your bank is willing to offer you a limit increase.
Then, providing all goes well and they say yes, you could lower your credit utilisation without spending anything less. Just try not to spend too much more!
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.