Maxing out your credit cards is never the best idea, but did you know that keeping your credit utilisation low could also help your credit score?
Credit utilisation is a strange term, but luckily it sounds much more complicated than it really is.
What is credit utilisation?
Your credit utilisation ratio describes what percentage of the credit available to you, you are actually using.
Let's say you have a credit card with a limit of £1,500. If, over the course of the month you spend £750 on the card, this would make your credit utilisation 50%.
Credit utilisation doesn't just work across one card, you can also calculate how much of your total available credit limit you are using.
Here's another example:
If you have three credit cards, one with a limit of £250, one with £1,500 and another with £2,000 the total amount of credit available to you would be £3,750. If you then spent £1,125 across all of those cards your overall credit utilisation would be 30%.
How does credit utilisation affect your score?
Your credit utilisation will have an impact on your credit score. For example, if you use too much of your total available credit or too much of a single line of credit, it could damage your score.
Lenders may also consider this when they're assessing your creditworthiness and ability to pay back credit.
Equifax have given the following information as a guide to show how credit utilisation might impact your credit score:-
If you use between 50% - 75% of your credit limit, this will show up as an ‘amber flag’ on your credit report, meaning it may have an effect on your credit score.
If you are using more than 75% of your credit limit, this will be a ‘red flag’ on your credit report, and it’s likely to have a negative effect on your credit score.
This means, ideally, you should think about carefully managing your credit utilisation.
What's the ideal credit utilisation level?
Keeping it under 30% (or even better under 20%) is typically a good strategy.
So for example, if your credit limit is £1000 on a card, you might not want to use more than £300. If you need to use more than 30% of the limit, consider spreading it across another card, rather than maxing out one card (but only if this makes financial sense).
But don't forget, to improve your credit score you have to show lenders that you have a history of responsibly using any money you've been lent. So if you leave your cards unused, with a 0% utilisation, that's likely to be negative too.
See, we told you it was easier than it sounds.