How can credit utilisation affect my credit score?

Credit utilisation sounds pretty dull, right? But knowing how it works could help you boost your credit rating.

If your credit score is on the low side but you’re not sure why, then 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 score.

What is credit utilisation?

The clue is in the name. Credit utilisation refers to how much credit we use, or rather, ‘utilise’. This is then measured against how much credit we have available to us.

Let’s say 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%.

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 raise a red flag.

This is because it can paint a negative picture of your relationship with credit. Spending right up to 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, is off-putting to future lenders you might apply to.

This doesn’t mean you have to cut up all of your cards in a panic. In fact, using and repaying credit regularly is an important part of building your credit score – 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 you’ve long since paid off, or a store card you haven’t used for ages, keeping the account open, even if you’re not using it, can have its benefits.

You might think it’s a silly idea, 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. Simple!

Keep an eye on your spending

It might sound obvious, but keeping a close eye on your credit utilisation could help you keep it from getting too high.

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 your cards’ apps, if this is a feature your card offers, 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 lender.

With a personal loan, you borrow all the money you need in one go, and then repay it in fixed instalments over time. You can use the money however you like (within reason), so you could get a loan to spread the cost of a large purchase, or even to consolidate a few credit cards or other loans into one, meaning you only have one monthly payment to think about.

Even though personal loans don’t count towards your credit utilisation, it’s still important to keep an eye on how much you owe, what you’re paying in interest, and make sure you can always afford all your repayments.

Credit utilisation and your credit limit

If you have one credit card and it has a relatively small credit limit, then keeping your credit utilisation low can be easier said than done. A few relatively inexpensive purchases with your credit card could cause your credit utilisation to skyrocket.

In this situation, getting a higher credit limit, either by accepting an offer from your credit card provider (if it comes) or by requesting your limit be increased (if your credit card provider allows this), could help you lower your credit utilisation without having to reduce your spending.

However, it’s worth bearing in mind that if you did spend more on your credit card after your limit was raised, this would increase both your credit utilisation and your monthly repayments.

When it comes to increasing your credit limit, it’s important to think about:

• how much you’d be able to spend with the new limit, while keeping your credit utilisation low (around 30% or less)
• what a change in credit limit, and potentially your spending, would mean for your monthly repayments – would they go up?
• whether you’d be able to comfortably afford higher monthly payments if you spent more on your card

If you aren’t sure about the answers to any of these questions, then it may be best to hold off on making any changes to your credit limit until you’ve had more time to think.