When it comes to improving your credit score, you’ve probably heard about the importance of keeping your credit utilisation ratio in check. But what exactly is it, why does it matter, and how can you manage it?
What is your credit utilisation ratio?
Credit utilisation ratio is the percentage of credit you’re using. It’s calculated by dividing the total amount of credit you’ve used by your total credit limit, then multiplying it by 100 to get a percentage.
For example:
If your credit limit is £1000 and you’ve borrowed £300, your credit utilisation ratio is 30%.
This number gives lenders a snapshot of how you’re managing your credit. The lower your ratio, the better it looks to lenders – and the more it can help your credit score.
Why credit utilisation ratio matters
Your credit utilisation ratio plays a big role in your credit score. Here’s why it’s so important:
- Impact on your credit score: A high credit utilisation ratio can lower your credit score, while a low ratio can boost it. It’s one of the key factors credit bureaus, like Experian and Transunion, use to calculate your score.
- How lenders see it: Lenders want to know you’re not overly reliant on credit. A low credit utilisation ratio suggests you’re managing your finances well.
- The ideal ratio: Generally, a ratio of 30% or less is considered healthy. Lower is even better if you can manage it.
Factors affecting your credit utilisation ratio
Several things can influence your credit utilisation ratio:
- Available credit limit: The higher your credit limit, the easier it is to keep your utilisation ratio low – as long as your spending doesn’t increase.
- Monthly spending habits: If you’re regularly maxing out your credit cards or carrying high balances, your utilisation ratio will increase.
- Payment history: Paying off your balance in full each month can help keep your ratio low and improve your overall financial health.
How to improve your credit utilisation ratio
If your credit utilisation ratio is higher than it should be, don’t worry – there are steps you can take to improve it:
- Pay down credit card balances: Focus on paying off as much of your credit card balance as possible. This is one of the quickest ways to lower your ratio.
- Request a credit limit increase (carefully): If you’ve been managing your credit responsibly, you could ask your lender to increase your credit limit. But be cautious – this only works if you don’t use the extra credit to spend more. With Zilch, you can use our Limit Builder feature to gradually unlock a higher credit limit by building positive repayment habits – giving you more flexibility while staying in control.
- Avoid opening new credit accounts: While opening a new account can increase your overall credit limit, it can also lead to hard credit checks, which may temporarily lower your score. Only consider this if you’re confident it will benefit your situation.
- Make timely payments: Paying on time not only helps your credit score but also ensures your balance doesn’t grow out of control.
Credit utilisation and you
Your credit utilisation ratio is a simple but powerful part of your financial picture. Keeping it low – ideally under 30% – can boost your credit score, make you more attractive to lenders and improve your overall financial health.
Start by paying down your balances, managing your spending and staying on top of your payments. With a little effort, you’ll be well on your way to a healthier credit profile.