What is the credit utilisation ratio?

Have you heard the term credit utilisation ratio and wondered what it means? We break it down and look at how it could affect your credit score.

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Your credit score is informed by lots of different factors. One of these is your credit utilisation ratio. It’s the percentage of your total available credit that you are currently using.

It helps lenders to understand how you use credit and whether or not you are a responsible borrower. If you have a high credit utilisation ratio, this could damage your credit score. But if you have a 0% ratio, you risk not showing a history of responsibly using credit.

Confused? Don’t be. Let’s break it down.

Credit utilisation ratio: what’s it all about?

Your credit utilisation ratio is the percentage of your total available credit that you are currently using. So, for example, if you have a credit limit of £1,000 on a credit card, and you spend £400 during the month, you will have used 40% of the £1,000 available to you. This means your credit utilisation ratio would be 40%.

However, your credit utilisation is not just tied to a single card. It is calculated over your total available credit.

In order to calculate your total credit utilisation ratio, you would need to add up all of the credit available to you and then work out the percentage.

In another example, if you had three credit cards with limits of £1,000, £2,500 and £500, the total amount of credit available would be £4,000. If you then spent £1,500 across all three cards, your overall credit utilisation would be 37.5%.

What’s a ‘good’ credit utilisation ratio?

How much of your credit you use impacts your credit score. So what’s a ‘good’ amount to use?

Here’s a rough guideline:

  • Over 75% – According to Equifax, if you are using more than 75% of your credit limit, this is likely to show up as a red flag on your credit report.
  • 50% to 75% – If you are using more than half of your available credit, then this is likely to be seen as an amber flag. It could have an impact on your credit score, but it’s not as negative as a red flag.
  • Under 30% – Keeping your credit utilisation under 30% is considered a good strategy. For some credit reference agencies, under 20% will further improve your credit score.

You may think that having a credit utilisation ratio of 0% would be a sure-fire way of achieving a good credit score. But actually, the opposite may be true. Lenders want to see how you use your credit and whether you are a responsible borrower. So if you don’t touch your credit card at all, they have no history of borrowing to draw conclusions from.

That doesn’t mean you should start spending unnecessarily on your credit card. But if you use your card and pay it off in full each month, then lenders will see that you can manage your money effectively.

How can I lower my ratio?

The easiest way to lower your credit utilisation ratio is to pay down your existing debt. But sometimes it isn’t possible to do that straight away.

In that case, you may want to look at reducing the cost of your borrowing.

You could transfer some of your existing debt to a 0% balance transfer card. This could free you from high interest charges for a set period of time, giving you breathing space to pay off your debt.

However, remember that balance transfer credit cards typically carry a transfer fee. Also, be aware that once the promotional 0% period ends, the card will return to its standard rate.

To find out more, check out our top-rated balance transfer credit cards in the UK and get the right one for you.