Credit Utilisation: Why It’s More Important Than You Think

Hi, it’s Michael Sherriff here with another edition of UK Credit Secrets. Today, we’re focusing on a key factor that plays a significant role in your credit score—credit utilisation.

Many people overlook this aspect, but it’s more important than you might think. Let’s break it down.

Tip of the Week: Keep Your Credit Utilisation Below 30%

One of the best ways to maintain a healthy credit score is to keep your credit utilization below 30%. This means using less than 30% of your available credit across all your credit accounts.

Here’s how you can manage it:

1. Spread Out Your Spending: If you have multiple credit cards, consider spreading out your spending to keep the utilisation on each card low.

2. Pay Off Balances Frequently: Try to make payments more than once a month if possible, especially before your statement date, to keep your reported balances lower.

3. Request a Credit Limit Increase: If your income and spending habits support it, requesting a credit limit increase can help lower your utilisation ratio, provided you don’t increase your spending.

By keeping your credit utilisation in check, you’ll show lenders that you’re managing your credit responsibly, which can lead to a higher credit score.

Main Article: Credit Utilisation—Why It’s More Important Than You Think

Credit utilization accounts for about 30% of your credit score, making it one of the most significant factors after payment history. Here’s why it matters:

1. What Is Credit Utilisation?
   Credit utilisation refers to the amount of credit you’re using compared to your total available credit. For example, if you have a credit limit of £10,000 and you’re using £3,000, your credit utilisation is 30%.

2. Impact on Your Credit Score
   High credit utilisation can be a red flag to lenders, indicating that you might be overextended or relying too much on credit. This can lower your credit score, even if you’re making all your payments on time.

3. Optimal Credit Utilisation
   Keeping your utilisation below 30% is generally considered good practice, but the lower, the better. Some experts recommend aiming for 10% or less to maximise the positive impact on your score.

4. Why Lower Is Better
   A lower credit utilisation ratio shows lenders that you’re using credit wisely and not over-relying on it. This can make you a more attractive borrower and lead to better loan and credit card offers.

5. Managing High Utilisation
   If you find yourself with high credit utilisation, there are a few strategies you can use to bring it down:

   • Pay Down Balances: Focus on paying off debt as quickly as possible.

   • Limit New Charges: Try to avoid adding new charges to your credit cards until you’ve reduced your balances.

   • Increase Credit Limits: As mentioned earlier, increasing your credit limits can lower your utilisation ratio, but only if you don’t increase your spending.

Understanding and managing your credit utilisation is crucial to maintaining a strong credit score. By keeping it low, you’re signalling to lenders that you’re a responsible borrower.

Tool Spotlight: Free Credit Report Services

To help you keep an eye on your credit utilisation and overall credit health, take advantage of free credit report services available in the UK:

1. Experian:
   Provides free access to your credit score and report, allowing you to monitor your credit utilization across all your accounts.

2. ClearScore:
   Offers a free monthly credit report and tips on how to improve your score, including managing credit utilization.

3. Credit Karma:
   Gives you a free view of your credit report and score, with personalised insights into your credit utilization and other factors.

These tools are invaluable for staying on top of your credit utilization and ensuring that it’s not negatively impacting your score.

What’s Next?

In our next edition, we’ll be exploring how to build credit from scratch if you’re just starting out. Don’t miss “Building Credit from Scratch: A Beginner’s Guide.”

If you have any questions or need further advice, feel free to reply to this email. I’m here to help!

Cheers,
Michael Sherriff
Founder, UK Credit Secrets