What is Credit Card Utilisation and how does it Impact your Credit Score?
Credit card utilisation is how much of the available credit on your credit cards you are using. It is calculated by dividing the amount of a person’s credit card balances by the credit limit on all of their cards.
For example, assume that you have three credit cards. If one card has a $1000 limit and the other two have $2000 limits, it adds up to a total of $5000. If you owe $500 on one card and $1000 on the other two cards, you would owe a total of $2500. In this example, your credit card utilisation rate would be 50%.
Having a high credit utilisation rate can hurt your credit score and impact how lenders see you. Most lenders would like to see a credit card utilisation rate of 30-35% or lower. A high credit card utilization suggests that a person is having difficulty paying down his or her credit card debt. Lenders will be wary of lending money to someone who struggles with existing debt.
It should be your goal to pay off your credit card debts in full each month. Carrying a balance can get very expensive, especially if you are only able to pay the monthly minimum payments. However, you’ll need to know that your credit card utilisation rate can be calculated at any time during your billing cycle, not just after you have made a payment. Therefore, even if you pay your balance off each month, you could have a high credit utilisation rate in between payments.
For example, if you have the three cards with a combined $5000 limit listed above and you put $2500 in purchases on those credit cards during the month, your credit utilisation rate will still be 50% until you make a payment. In order to solve this issue, consider making fewer purchases on credit cards or make more than one payment each month in order to keep your utilisation rate low throughout the month.
Keep in mind that credit card utilisation is just one tool that lenders and credit agencies use to determine a credit score. This means that a person with a history of good credit and a 50% credit utilisation rate will not have their credit rating affected as much as someone who has a bad credit history or no credit history and the same utilisation rate.
Also, note that, while a lower credit card utilisation rate is almost always preferable, a rate of 0% is not a good idea. This either means that a person has no credit or that they have credit cards but they do not use them. Having a history of successfully borrowing money on a credit card and paying it back on time helps you build your credit score.