What is credit utilisation rate?
Your credit utilisation rate is the amount of available credit you’re using, expressed as a percentage. You can work out a utilisation rate by taking the balance, dividing it by the limit, and then multiplying by 100:
Eg a £100 balance on a card ÷ the £500 limit * by 100 = 20%
There are 3 kinds of utilisation rate, all of which are taken into account by credit reference agencies. Let's break each of them down with an example:
1. Individual Utilisation Rate: This is the utilisation rate on any one of your credit accounts.
For example, if you have a credit card with a limit of £1000, and your balance is £250, then your individual utilisation rate would be 25% for this card.
2. Total or Overall Utilisation Rate: This is the utilisation rate across all of your credit accounts.
For example, if you have 2 credit cards, one with a limit of £1000 and a balance of £250, and another with a limit of £2000 and a balance of £400, your total utilisation rate would be 21.6%.
To work this out:
- Add the balances together: £250 + £400 = £650
- Add credit limits: £1000 + £2000 = £3000
- Divide the total balances by the total credit limit: £600/£3000 = 0.216
- Multiply the quotient by 100: 0.216 x 100 = 21.6%
3. Maximum Utilisation Rate: This is the individual utilisation rate that is highest across all of your credit accounts.
For example, if you have 3 credit cards, one with a utilisation of 20%, another with a utilisation of 34% and the other with a utilisation of 11%, then your maximum utilisation would be 34%.
Why is my utilisation rate so important?
It's one of the biggest influences on your credit score. Depending on the credit reference agency, it can make up anywhere between 20 and 30% of your score.
Utilisation tends to relate to the amount of interest that you pay on the same account. A higher balance can both accrue more interest, and make it more challenging to repay in one go - increasing the time over which you are charged.
Reducing your utilisation rate can save you money on interest now and as your credit score increases, save you even more money in the future as you are able to access credit at lower interest rates.
How can I reduce my utilisation rate?
It's important to make sure you don't fall into the trap of using too much of the credit that is available to you.
The more of your available credit you spend, the more reliant on these funds you appear to be to credit reference agencies. This often leads to them scoring you as higher risk, thus reducing your credit score. The higher your utilisation rate, the lower your credit score is likely to be, and vice versa.
Getting your utilisation low enough that it doesn't count against you means keeping it below 25% if you can. If you can do that on each of your credit lines, then your individual, total and maximum utilisation rates will be in the best position to positively impact you.
Steps I can take
Make a note of these points below, and each month when you're paid, work out what you need to pay, and when.
The most important point of all is to remember that keeping your utilisation rate on each of your credit lines below 25% is optimal.
Although these 3 steps seem really simple, doing them consistently each month will put you in the best position to increase your credit score:
1. Work out your current utilisation rate
The first step is to know your balance and utilisation rate for each of your credit accounts.
2. Know your dates
Next, give your card issuer(s) a call and ask them the date they report you to the Credit Bureaus. Put a reminder in your calendar to make your payment at least 2 working days before this date.
3. Make a change to your spending
Consider if purchases need to be made this month. Can they be split across multiple paycheques so you don't need to use credit? If a purchase must be made, can some or all of it be paid for by debit card and/or cash?
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