Understanding how your credit card usage impacts your financial health can help you make smarter decisions about your money.
One often overlooked but important factor is credit utilisation. This is a key piece of the puzzle when it comes to maintaining a healthy financial foundation and improving your chances of borrowing in the future.
Let’s explore what this ratio is, why it matters, and how you can improve it.
What is credit utilisation?
It refers to the percentage of your available credit that you're currently using. You can calculate your ratio by dividing the balance on your credit card(s) by your total credit limit and multiplying the result by 100.
For example, if you have a card with a £1,000 limit and you’ve spent £300 on it, your credit utilisation ratio would be 30%.
It’s important to note that it's not just about individual cards, but your total available credit across all cards. So, if you have several with different limits, you’ll need to combine them to get your overall ratio.
Why does it matter?
Credit utilisation is a fundamental factor in determining your credit score, which is used by lenders to assess your creditworthiness.
A lower ratio signals to lenders that you’re not relying too heavily on credit, which suggests that you're managing your finances more responsibly. On the other hand, a high ratio can raise red flags and may negatively impact your chances of borrowing money.
This is because using a large proportion of your available credit suggests you might be over-relying on borrowed money. This may make lenders more hesitant to lend money to you.
What is a healthy ratio?
There's no one-size-fits-all answer to this,
For example, if your total credit limit (across all your cards) is £5,000, try to keep your outstanding balance under £1,500. This is especially important if you're thinking of applying for a mortgage or personal loan soon.
How to improve your credit utilisation ratio
If your ratio is too high, there are a few things you can do to improve it.
- Pay off your existing balances as soon as possible: Reducing your outstanding balance is the fastest and simplest way to lower your ratio. Larger payments should help reduce your utilisation percentage more quickly, but do whatever is manageable for you.
- Request a higher credit limit: You should be able to ask your card provider. If you’ve built a good repayment history, they might be willing to increase your limit. This can help lower your overall ratio because your balance will account for a smaller percentage of your total credit.
- Reduce your spending: While you're paying off your existing balances, it's worth reducing or stopping credit card spending until your ratio is lower. Once it's low, try to keep it that way if you can.
Keeping an eye on your credit utilisation allows you to build a stronger financial foundation and improve your creditworthiness over time. Work out your ratio today.
Is there any article supporting this
Yes:
https://www.moneysupermarket.com/credit-score/credit-utilisation-ratio/#:~:text=It%20is%20widely%20agreed%20that%20a%20ratio%20of%2030%25%20or%20under%20is%20good
https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/#:~:text=30%25%20is%20the%20point%20at%20which%20it%20starts%20to%20have%20a%20more%20pronounced%20negative%20effect%20on%20your%20credit%20score
https://www.uswitch.com/credit-cards/guides/credit-utilisation-rate/#:~:text=But%20generally%2C%20it%E2%80%99s%20best%20to%20keep%20your%20credit%20utilisation%20ratio%20at%2030%25%20or%20below.
https://www.equifax.com/personal/education/debt-management/articles/-/learn/credit-utilization-ratio/#:~:text=Lenders%20typically%20prefer%20that%20you%20use%20no%20more%20than%2030%25%20of%20the%20total%20revolving%20credit%20available%20to%20you.
