What Is Using Credit And Why Is It Important? – Adviser Forbes UK

Have you ever come across the expression “use of credit” and wondered what it means? Even if you’ve never met it, it’s worth understanding how it works and how it affects your credit rating.

This guide explains everything and shows you how to calculate your own credit utilization rate.

What is the use of credit?

Your credit utilization rate, or credit utilization ratio, describes the percentage of your credit card’s credit limit (the maximum amount you can borrow) that you use. This is one of the factors that affects your credit score – and your score helps determine whether you will be accepted for credit-based products and whether you will be offered the most competitive terms.

If your credit usage is low, lenders may find that you are only using a small portion of the credit you have and they may be more willing to lend you as a result.

If your credit usage is high, on the other hand, lenders may think that you are already heavily reliant on credit and therefore may be reluctant to let you borrow more.

You will find your credit limit on your credit card statement.

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How do I calculate my credit utilization rate?

To calculate your credit utilization rate, simply divide the amount you owe on your card by your credit limit and multiply the total by 100. Having your latest credit card statement on hand can help.

To give you an example, if your credit card had a credit limit of £ 2,500 and your balance was £ 1,000, your credit usage would be 40% (£ 1,000 divided by £ 2,500 = 0.4 x 100 = 40).

Credit usage does not only apply to singles credit card or accounts, however. You can also calculate how much of your total available credit limit you are using.

So if, for example, you had the above credit card with a limit of £ 2,500 and a balance of £ 1,000, but also a second credit card with a limit of £ 3,000 and a balance of £ 2,000, your Overall credit usage would be 55% (total debt of £ 3,000 divided by total credit limit of £ 5,500 x 100 rounds off to 55%).

How Does Using Credit Affect My Credit Rating?

If your credit usage rate is high, it can negatively impact your credit score. The reason is, if you use up a lot of the credit that you have available, lenders may think that you are in financial difficulty and that you are relying on credit to help you.

For this reason, you may be considered high risk from a creditworthiness perspective, and lenders may be less willing to let you borrow.

On the other hand, if you have access to funds that you are not actually using, it could suggest that you are solvent, in control of your finances, and that you do not need to resort to borrowing.

Keep in mind that if your credit utilization rate is important, lenders won’t use it on their own when deciding whether or not to lend to you. Other factors, such as the quality of your borrowing in the past, will also play a role.

What is a “good” credit utilization rate?

In an ideal world, it’s best to keep your credit utilization rate below 30%. If this is not possible, aim for less than 50%.

Anything over 50% can be reported on your credit report, and over 75% certainly will.

How can I reduce my credit utilization rate?

There are a number of things you can do to lower your credit usage rate, such as:

Pay off your debt

Perhaps the easiest way to lower your credit utilization rate is to pay off some of your existing debt if you can. Once paid, you will need to stay disciplined and resist the temptation to start using credit again.

Get rid of your debt at a lower cost

You can also transfer part of your existing credit card debt to a 0% balance transfer credit card. This will save you from paying interest for several months and may help you pay off your debt faster. Be aware that there will be transfer fees to pay and that you will ideally have paid off your debt before the 0% period ends and interest kicks in.

Do not cancel unused credit cards

If you’ve paid off your credit card balance in full and you don’t plan to use it again, rather than closing your account, leaving it open can actually help lower your credit usage rate. .

However, it’s important to make sure you keep an eye on monthly fraud statements and try not to spend on the card.

Apply for a higher credit limit

Otherwise, asking your provider to increase your credit limit will also help lower your credit utilization rate. Just make sure you don’t use that upper limit to spree on spending. Also note that any time you request a credit limit increase it will be recorded on your credit report – so avoid asking too often. Certainly keep your requests to one or two per year at most.

Compare credit cards

Find the cards you’re most likely to be approved for, without affecting your credit score


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