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What is your credit utilisation rate?
Find out what a credit utilisation rate is, how to calculate it and how it can affect your credit score.
Understanding how to calculate your credit utilisation rate and how it can affect your credit score is important – particularly if you’re about to apply for more credit, such as a credit card, mortgage or loan. Our guide explains everything you need to know.
What does credit utilisation ratio mean?
Your credit utilisation rate (or ratio) is the percentage of your overall credit limit (the amount of credit you have available to you) that you are using.
Your credit utilisation rate is important because it influences your credit score. This helps lenders decide whether they are happy to offer you more credit and on what terms.
If you have a low credit utilisation rate, lenders can see that you’re only using a small amount of your available credit. They may be more willing to let you borrow, as a result.
But if your credit utilisation rate is high, this suggests you are already heavily relying on credit. And this can make it harder for you to get more credit.
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How does your credit utilisation rate affect your credit score?
If you have a high credit utilisation rate, your credit score can go down. Using a lot of your credit limit often indicates poor money management, which means lenders view you as higher risk.
Having a low credit score makes it harder to take out more credit. Or, if a lender accepts your application, you often end up paying a higher interest rate.
If you lower your credit utilisation rate, you should improve your credit score. Having a low credit utilisation rate suggests you’re managing your credit accounts sensibly and aren’t overspending.
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How to calculate your credit utilisation rate
You can calculate your credit utilisation rate by dividing the amount you owe on all your credit cards by your total credit limit. Then multiply the answer by 100. For example, if you have one credit card with a credit limit of £3,000 and another with a credit limit of £2,000, your overall credit limit is £5,000.
If your total balance is £2,500, your credit utilisation ratio is 50% (£2,500 divided by £5,000 = 0.5 x100 = 50).
If you increase your total balance to £4,000, your credit utilisation rises to 80%.
It’s worth noting that you don't need to include other debts, such as personal loans or your mortgage, when working out your credit utilisation rate. That’s because UK providers only look at revolving lines of credit (i.e. credit cards) when calculating this figure.
What’s a good credit utilisation ratio?
The lower your credit utilisation ratio the better. But generally, it’s best to keep your credit utilisation ratio at 30% or below. If you can’t manage that, try to keep it under 50%.
Anything over 50% is usually considered a high credit utilisation ratio and goes on your credit report.
How can I lower my credit utilisation rate?
There are lots of steps you can take to lower your credit utilisation rate. These include:
Paying down debt
Perhaps the easiest option is to pay off some of your credit card debt if you can. Your credit utilisation ratio will drop as a result.
Reducing your spending
Once you’ve paid off some of your credit card debt, try to avoid spending on credit again. If that’s not possible, try to ensure your spending stays below 30% of your credit limit.
Applying for a credit limit increase
You could also ask your credit card provider for a credit limit increase. This will lower your credit utilisation rate as you have more available credit to use. Your card provider is more likely to agree to this if you have a history of repaying your debts on time.
Be aware that your provider will record any credit limit requests on your credit file, so you should avoid asking for increases too often. You should also avoid using your higher credit limit as an excuse to spend more.
Opening a new line of credit
Another option is to apply for a new credit card. This increases the amount of available credit you have. However, a hard credit check occurs every time you apply for credit, and this can impact your credit score. So, it’s best not to do this too often. Opening another credit card could also encourage you to get deeper into debt.
Not closing old credit card accounts
If you are no longer using a particular credit card, it can be worth leaving the account open rather than cancelling the card. Leaving it open means you have more credit available to you, lowering your credit utilisation rate. Just resist the urge to spend on your old card and keep an eye on your monthly statements for signs of fraud.
FAQs
Is credit utilisation the same as debt-to-income ratio?
No, your debt-to-income ratio is a measure of how much of your monthly income goes towards paying debt. Lenders often look at this alongside your credit utilisation ratio to determine whether you can afford to take on new credit.
As an example, if you pay £800 on your mortgage, £100 on your credit card and £100 on a loan, your debts total is £1,000 per month. If your monthly income is £2,500, your debt-to-income ratio is 40%.
How much of your credit limit should you use?
It’s best to use less than 30% of your credit limit if you can. If not, try to avoid going over 50% as anything above this rate usually goes on your credit file.
Should you keep a low credit limit?
This depends on how often you use your credit card and whether you pay off the balance immediately.
If your credit limit is too low, you might need to request an increase. However, each request goes on your credit file which can impact your credit rating. Some card providers offer automatic credit limit increases if you’ve managed your borrowing well. But you can ask to stick to your current limit if you prefer.
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