‘Credit card utilisation’ is a term you may hear from time to time, particularly when you’re thinking about increasing your credit limit. But what is it?
In this blog, we’ll explain what credit utilisation is and how it can affect you, your credit history and your ability to borrow.
Credit card utilisation describes the relationship between how much you’ve spent on your credit card and how much you could spend if you borrowed up to your maximum credit limit.
Let’s look at an example. If the limit on your credit card is £2,000 and your balance is £1,000, your utilisation will be 50%. Or, if you’ve borrowed £500 on your card, the utilisation will be 25%, and so on.
What does this mean for me?
So, now you know what credit card utilisation is, how does it affect you?
Well, generally speaking, if you’re applying for some form of credit and you have a credit card already, lenders look most favourably on a utilisation mark of around 25%. This means that you should avoid the temptation to spend up to your credit limit, and make sure you pay as much of your credit card balance off as you can each month.
Ideally, you should aim to clear your balance in full. Doing this means you won’t have to pay any interest. At the very least you must make your minimum payment, as if you don’t your credit history will be damaged and you could be charged by your lender.
What if my utilisation is more than 25%?
You may have taken out a credit card to pay for an expensive item and then split the cost into manageable monthly payments. If you have, there’s every chance your utilisation could be above 25%.
If this is the case, don’t worry too much. You took out a credit card for a reason – to make a one-off purchase more manageable. Clear as much of your balance as you can every month, and avoid the temptation to spend more with the credit card – it will only take longer to pay off.
What if I’m planning to borrow more?
So, let’s say you’re thinking of applying for a mortgage and you already have a credit card. If your utilisation of it is 25% or so, that should help your application, right?
Well, yes it should. But remember that every lender has their own criteria against which they measure applicants. As well as looking at the utilisation of your credit card, they may also take into account the credit limit.
So, if you have a credit card with a £2,000 limit that you don’t use, a mortgage provider you apply to may worry about how you would afford your mortgage and your credit card payments if you did spend up to your credit limit on this card.
Even though you aren’t using the card and may not be planning to, if you did, you could spend up to £2,000. Paying this off each month and keeping up with your mortgage may stretch your finances too far – and that’s a real concern to some lenders.
So what’s the answer?
This is a difficult question to answer. As we said, every lender has their own list of criteria when it comes to weighing up borrowers’ applications for credit.
If you’re planning to borrow, keeping your credit card utilisation around 25% - and certainly no more than this – is a good idea. Keeping up with your payments and never missing one shows lenders you’re a responsible borrower.
Should your utilisation be more than 25%, it might be best to put off applying for more credit and to focus on clearing the balance on this card. Try to get your utilisation down as much as you can before you apply to borrow more.
"If you have a credit card you’re not using, consider closing the account."
And if you have a credit card with a large limit on it that you’re not using, consider closing the account. Once it’s closed, the credit card will no longer be factored into your potential borrowing when you apply to a new lender.
We hope that’s cleared up any questions you had about credit card utilisation. We’re committed to busting the financial jargon, so come back soon to get to the bottom of more tricky financial queries.
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