What is a credit utilization rate?

Understanding a credit utilization rate.

People like to talk about their credit scores and they want the highest credit score there is. Not many people truly understand how a credit score works.

It's no secret that credit scores are individualized and there really isn't a universal formula for calculating what determines your credit score. This often makes it hard to determine why you've gotten such a high or low credit score.

What is credit utilization?

Your credit utilization ratio is the amount of credit you are using, divided by your total credit limit. This will determine how much of your available balance has been used up by your purchases. In other words, it's how much you owe versus how much you have to spend.

Credit utilization rates are based on revolving credit facilities. This includes any balances you have on your credit cards, as well as any outstanding lines of credit. Installment loans like mortgages or vehicle finance are not factored into the amount of credit that is being used during a given month.

Per-card vs. total utilization

While your overall credit utilization rate is generally calculated by comparing the total amount of debt you have to different sources of credits, your per-card credit utilization rate is calculated in a similar way. It's based on what portion of the total available credit you are using at any moment on an individual credit card or loan facility.

What is a good credit utilization rate?

In the case of a credit score, generally it's good to remember that you should aim to use less than 30% of your available balance. For example, if you have a total credit limit of R10,000, you shouldn't exceed a total credit balance of R3,000 at any point in time because when you do so, lenders or creditors will realize that you have been overspending and therefore consider this to be a sign that you don't take your finances seriously.

Credit utilisation is the proportion of credit that you are using at any given time. This can either be a good thing or a bad thing, depending on the way you use credit. If you use a lot of your available credit, your credit utilisation will be high. If you use very little of your available credit, your credit utilisation will be low. It's important to monitor your credit utilisation rate. This is because a high credit utilisation rate will make it harder for you to build good credit over time. If you need help understanding your credit utilization rate, contact Credit Health for advice.