We’ve all been there. Frantically searching for ways to manage your credit card better…
You’ve probably sought out advice on budgeting, might even be making the full payments each month. So why does your monthly payment keep increasing? Fret no more – we’ve got all the answers.
The missing piece of the credit card puzzle is credit utilisation. Never heard of it? You’re not alone. Let us explain all…
What is credit card utilisation?
Credit card utilisation is the ratio of your outstanding credit card balance to your credit card limits. So if you have a credit card limit of £1,000 and you’ve spent £100, your credit utilisation rate is 10%. Easy, right? Credit utilisation works across more than one card too. To calculate it, all you have to do is divide the total balance of all your credit cards by the total number of credit limits on all your credit cards.
How does this affect your credit score?
- Credit card utilisation directly impacts your credit score. For example, if it’s too high, it will affect your credit score negatively. Lenders can use your credit card utilisation rate to assess your ability to pay back future credit.
- The general rule of thumb is that a good credit utilisation rate falls below 30%. Anything above that may harm your credit score.
- Contrary to popular belief, having a credit utilisation rate of 0 can also harm your credit score. If you actively use your credit card and are good at making regular payments and clearing your balance, then having a utilisation rate of 0 will impact your credit score positively.
- If you’ve taken out a credit card and think the best way to improve your credit score would be to not use your credit card, you’d be very wrong. Not using your credit card could have a negative impact on your score as your card could be cancelled due to inactivity, and this would cause a dip in your credit score. Here are some key terms to help you along your way.
|Current Balance||The amount you currently owe on your credit card.|
|Credit Limit||The amount of credit that a financial institution, i.e. a bank, has lent you.|
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