Understanding credit utilisation is one of the most important steps you can take to improve and maintain a healthy credit score. But what exactly is credit utilisation, and why does it matter so much? Let’s break it down in simple terms and share some practical tips to keep your credit utilisation low, and your credit score high.
What Is Credit Utilisation?
Credit utilisation is the percentage of your total available credit that you’re currently using. This usually refers to revolving credit, like credit cards. For example, if your combined credit limit is R20,000 and you owe R5,000, your credit utilisation is 25%.
Why does this matter? Credit bureaus look closely at your credit utilisation ratio to understand how well you manage credit. Keeping this ratio low signals that you’re not relying too much on borrowed money and can responsibly handle debt.
How to Calculate Your Credit Utilisation Ratio
Calculating your credit utilisation ratio is easy:
- Add up all your outstanding balances on credit cards and revolving accounts.
- Add up your total credit limits.
- Divide your total balances by your total credit limits.
- Multiply by 100 to get a percentage.
Example:
- Card 1 limit: R5,000 with R1,000 balance
- Card 2 limit: R10,000 with R2,500 balance
- Card 3 limit: R8,000 with R4,000 balance
Total credit limit = R23,000
Total balance = R7,500
Credit utilisation = (7,500 ÷ 23,000) × 100 = 32.6%
Why Keeping Credit Utilisation Low Is Crucial for Your Credit Score
Credit utilisation makes up about 30% of your credit score calculation. The lower your utilisation, the better your score looks to lenders. Ideally, keep your credit utilisation below 30% to maintain a strong credit profile.
A high credit utilisation ratio can signal financial stress and risk, which can lower your credit score and impact your ability to get loans or better interest rates. Here’s How to Keep Your Credit Utilisation Low:
Practical Tips to Keep Your Credit Utilisation Low
- Pay down your balances: Try to keep your spending below 30% of your credit limits.
- Avoid closing old credit cards: Closing accounts lowers your total available credit, which can raise your utilisation ratio.
- Ask for a credit limit increase: If you qualify, a higher credit limit can lower your utilisation without changing your spending.
- Use credit cards wisely: Make small purchases and pay them off in full each month.
- Be patient: It can take a few billing cycles for credit bureaus to update your utilisation ratio after you pay down debt.
Should You Open or Close Credit Cards?
Opening a new credit card can help lower your credit utilisation by increasing your total available credit, but remember new cards come with a credit inquiry that might temporarily lower your score. Conversely, closing a credit card reduces your available credit, which may increase your utilisation ratio if you carry balances on other cards.
Is Zero Credit Utilisation a Good Thing? Not necessarily. Having no credit utilisation may not harm your score, but lenders prefer to see that you use credit responsibly. Maintaining a low but active credit utilisation shows you can manage credit well.
Keep Your Credit Utilisation in Check for a Healthy Credit Score
Your credit utilisation ratio is a powerful factor in your credit score. By paying down debt, keeping your utilisation under 30%, and managing your credit cards wisely, you’ll build a stronger credit profile that lenders trust. Regularly monitoring your credit utilisation can help you stay on track and make smart financial decisions that improve your creditworthiness over time.