Before we dive into how using your credit card may affect your credit scores, let’s recap what we mean when we talk about “credit utilisation.”
Credit utilisation refers to how much of your available credit you use at any given time.
You can figure out your credit utilisation rate by dividing your total credit card balances by your total credit card limits. The resulting percentage is a component used by most of the credit scoring models because it’s often correlated with lending risk.
It’s recommended that you keep your overall credit utilisation below 25%. Lower credit utilisation rates suggest to lenders that you can use credit responsibly without relying too heavily on it, so a low credit utilisation rate may be correlated with higher credit scores.
Now that we’ve defined our terms, let’s look more closely at how your credit utilisation relates to your credit scores.
- Why does my credit utilisation impact my credit scores?
- How does my credit utilisation impact my credit scores?
- How can I lower my credit utilisation?
Why does my credit utilisation impact my credit scores?
As we mentioned above, your credit utilisation rate is an important indicator of lending risk. In the eyes of most lenders, a person who constantly hits or goes over their credit limit is more likely to have difficulty repaying that money.
Conversely, someone who uses their credit card for smaller amounts may be more likely to be able to pay off their balance in full each month, and thus represents a lower risk to the lender.
How does my credit utilisation impact my credit scores?
There are many different credit scoring models, so it’s difficult to calculate exactly how credit utilisation will impact your credit scores.
With that said, there’s a strong correlation between a consumer’s credit utilisation rate and their credit scores. Though individual cases may vary, those who keep their utilisation percentage low generally have higher scores than those who habitually max out their credit cards.
If you don’t want your credit utilisation to negatively impact your credit scores, it’s important to consider your spending habits. Factors such as your credit history and the number of cards in your wallet matter, too.
High utilisation on a single credit card could especially hurt your credit scores if you have a short credit history and only one card. On the other hand, you may feel the effects less if you have a long and excellent credit history and spread your utilisation across multiple cards.
Although it’s an important factor in calculating your credit scores, try not to focus just on this one aspect. Keep the big picture in mind.
How can I lower my credit utilisation?
Here are three tips that may help you lower your credit utilisation .
- Make credit card payments more than once a month. This way, your balance never gets too high. Your credit card provider will typically report your credit activity to the credit reference agencies once a month. So, if you pay off a portion — or even all — of your credit card bill before that date, you can lower your credit utilisation.
- Spread your charges across multiple cards each month. Using multiple cards will result in multiple accounts of low credit utilisation rather than one account with high utilisation. Keep in mind, however, that certain credit scoring models will look at your overall credit utilisation and/or the utilisation on individual credit cards, so this technique may not always work.
- Increase your available credit. If your income has increased, you’ve maintained an amazing credit history, or you have little debt, it doesn’t hurt to ask for a credit limit increase. Just remember that this can sometimes result in a hard credit search on your credit file.
Bottom line
You don’t have to carry a credit card balance or pay interest every month to show credit utilisation. Even if you pay your credit card balances in full every month, simply using your card is enough to show activity.
While experts recommend keeping your credit utilisation below 25%, it’s important to note that lenders also care about the total amount of your available credit.