Why you should only use a quarter of your credit limit

Proud that you’ve never maxed out your credit limit? Well, while this is certainly a good habit, there’s something else you should be doing – and it could improve your credit score.

We’ve talked about credit card utilisation before, but did you know it could play a role when you apply to a new lender? And, according to some sources, the golden rule is to keep your credit utilisation around 25%.

Let’s take a closer look.

Wait, what is credit card utilisation?

Credit card utilisation is the name given to the percentage that represents how much of your credit limit you’ve used compared to how much you have available. So, if you have a credit card limit of £1,000 and you’ve spent £500, your utilisation is 50%.

And if, next month, you don’t spend anything on your credit card but make a repayment that takes your outstanding balance to £250, your credit card utilisation will now be 25%.

If you have more than one card – or any other credit product – add all the limits together and all your outstanding balances together, and from this you’ll have your total credit utilisation. For example, if you have a credit card with a £1,000 limit and a £250 balance, and another with a £2,000 limit and a £200 balance, your utilisation is 15% - safely below 25%.

Why 25% is the magic number

According to Experian, it’s a good idea to keep your credit card utilisation at around 25%. Other experts have recommended keeping it around 30% - so somewhere between these two figures sounds like a safe bet.

The reason for this is that when a lender checks your credit history, they’ll see that you can be trusted to only spend what you need to and not go all the way up to your limit. What lenders want to see is a responsible borrower, who is able to use the credit they’re given and pay it back again.

They can get this information by taking a look at your credit history, and all lenders will do this when you apply to them for credit.

The lower the better?

So, keeping your credit utilisation around 25-30% is a good idea, but what if it’s actually at zero? Well, if this is because you’ve never borrowed, it can actually work against you. Find out why having no credit history makes lenders wary here.

And if it’s because you’ve simply stopped using a particular credit card, it may also go against you. In this case, it could be worth simply closing the account (as long as the balance is cleared).

If you don’t, future lenders may still regard you as having a certain amount of credit available to you – even though you’re not using it – and worry that lending you more will overstretch your finances.

My credit card utilisation is high

If your current utilisation percentage is a lot higher than 30%, try not to worry too much. The most important thing is that you make at least your minimum payment each month and clear the balance as soon as you can.

Late and missed payments are more of a warning sign to lenders than high credit card utilisation. Just be sure to stay on top of your repayments until you’ve paid off your balance.

What your utilisation rate is only really matters if you’re planning to apply for credit – that’s when lenders will look at it. So, if your credit card limit is £1,000 and the balance is £500, but you plan to pay another £250 towards this next month, hold off applying to a new lender until then.

As we said, it’s all about proving you can use the money you borrow responsibly. If you took a credit card out to make a big purchase more affordable and you have a high balance you’re paying off gradually, by making your repayments on time each month you’re showing you can do exactly this.