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What Is The Utilization Rate On A Credit Card?

What Is The Utilization Rate On A Credit Card

Written by Kimberly Linhares

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October 20, 2021

Have you ever come across the phrase ‘credit utilisation’ and wondered what it means? Even if you’ve never encountered it, it’s worth understanding how it works and the impact it can have on your credit rating. This guide will help you understand the question, “What is the utilization rate on a credit card?”

What Is The Utilization Rate On A Credit Card
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What Is A Credit Utilization Rate?

Your credit utilisation rate, also known as your credit utilisation ratio, is the percentage of your credit card credit limit (the highest amount you can borrow) that you are currently utilising. It’s one of the criteria that influences your credit score, which determines whether you’ll be approved for credit-based products and if you’ll be offered the best conditions. Lenders may be more inclined to lend to you if your credit utilisation is low since they can see that you are only using a tiny portion of the credit available to you. On the other hand, if your credit utilisation is high, lenders may assume that you are already excessively reliant on credit and may be hesitant to let you borrow. You will find your credit limit on your credit card statements.

What Is The Utilization Rate On A Credit Card?

To calculate your credit utilisation rate, simply divide the amount you owe on your card by your credit limit and multiply the total by 100. Having your latest credit card statement to hand may help you with this. 

To give you an example, if your credit card had a line of credit limit of £2,500 and your balance was £1,000, your credit utilisation would be 40% (£1,000 divided by £2,500 = 0.4 x 100 = 40).

Credit utilisation doesn’t just apply to single credit cards or checking accounts, however, you can also calculate how much of your total available credit limit you are using.

So if, for example, you had the above credit card with a limit of £2,500 and a balance of £1,000, but also a second credit card with a limit of £3,000 and a balance of £2,000, your overall credit utilisation would be 55% (total debt £3,000 divided by total credit limit £5,500 x 100 rounds out to 55%). Calculating this will help you understand the question,”What is the utilization rate on a credit card?”

What Is The Best Credit Card Utilization Percentage?

Aiming to keep what is a good revolving utilization percentage of 10% (or below) is a healthy goal to get the best credit score.

How Does Credit Utilisation Affect My Credit Score?

Your credit score may be negatively impacted if your credit use ratio is high. The reason for this is that if you’re using a lot of credit, lenders may assume you’re having financial difficulties and dependent on credit to get by. As a result, you may be perceived as a high-risk borrower, and lenders may be less reluctant to lend to you. On the other hand, having funds available that you aren’t using could indicate that you are solvent, in charge of your finances, and don’t need to borrow.

Keep in mind that, while your credit utilisation rate is essential, it will not be used by lenders to decide whether or not to lend to you on its own. Other considerations, like, as your borrowing history, will also come into play.

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What Does It Mean To Have A “Good” Credit Utilisation Rate?

In an ideal situation, you should maintain your credit utilisation percentage below 30%. If this isn’t practicable, shoot for less than 50%. Anything above 50% will almost probably be flagged on your credit record, and anything over 75% will almost certainly be.

How Can I Lower My Credit Utilisation Rate?

There are a number of steps you can take to lower your credit utilisation rate, such as:

Debt Repayment

If you can, pay off some of your existing debt to reduce your credit utilisation rate. Once you’ve paid it off, you’ll need to maintain your discipline and fight the need to use credit again.

Getting Rid Of Your Debt For Less Money

You might also use a 0% balance transfer credit card to transfer part of your existing credit card debt. This will save you money on interest for several months and may allow you to pay off your debt faster. You should be aware that there will be a transfer charge to pay, and you should ideally have paid off your debt before the 0% period ends and interest begins to accrue.

Credit Cards That Haven’t Been Used In A While Aren’t Being Cancelled

Rather than cancelling your credit card account after paying off your amount in full and not intending to use it again, keep it open to assist lower your credit use ratio. However, it’s critical to keep an eye on monthly statements for signs of fraud and avoid using the card.

Requesting A Higher Credit Limit

Requesting a credit limit increase from your provider can also help you lower your credit use rate. Just make sure you don’t go on a spending binge with this increased credit limit. Also, keep in mind that every time you request a credit limit increase, your request will be noted on your credit report – so avoid asking too often. Certainly keep your requests to one or two per year at most.

PS: If there’s anything more you’d like us to know about. Add it to the comments section!

Thank you for reading this blog on ‘What Is The Utilization Rate On A Credit Card?’ . If you’d like to read more, here are some blogs that might be of interest to you:

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