Does Credit Utilization Matter? Here's How It Can Affect Your Credit Score
Introduction
Your credit utilisation ratio plays a significant role in building your overall credit report. But what exactly is a credit utilisation ratio? What should you know about it? Let’s understand, in simple terms, what a good credit utilisation ratio is & how it impacts you.
What is Credit Utilisation Ratio
The credit utilisation ratio is the percentage of your total available credit currently in use. It plays a role in determining your overall credit score. The lower the credit utilisation ratio, the better the chances of improving your credit score.
How does the Credit Utilization Ratio Formula work
Credit Utilization Ratio = (Total Credit Used / Total Credit Limit) x 100
For example, if you have a total credit limit of $10,000 and you have used $3,000, your credit utilization ratio is:
($3,000 / $10,000) × 100 = 30%
You can also use a credit utilisation calculator to determine the percentage of available credit.
What is considered a Good Credit Utilization Ratio
For ideal credit utilisation, it is advisable to keep your credit usage under 30% of your total credit limit. The lower the credit utilisation rate, the less likely you will seem to be relying on credit.
Recommended Credit Utilization Levels:
0-10%: Very low utilization (shows you're using only a small portion of your available credit)
10-30%: Healthy range (aligns with Canada's recommendation to keep utilization below 30%)
30-35%: Higher than recommended (consider reducing your balances)
35-50%: High utilization (may negatively affect your credit profile)
50%+: Very high utilization (indicates you're using a large portion of available credit and may be viewed as higher risk)
How Does Credit Utilization Ratio Affect Your Credit Score
Credit scores are calculated by credit bureaus such as TransUnion Canada and Equifax Canada. Credit utilization is one of the most crucial factors in determining your credit score. Here's how it impacts you:
Lower Utilization = Higher Credit Score
If your credit utilisation ratio is really high, it can damage your credit score. Keeping your utilization ratio low indicates to credit bureaus that you are responsible with your credit. It directly helps you boost your score.
Higher Utilization = Affecting Credit Score
Using too much of your available credit may indicate that you are highly dependent on your credit cards for your finances, which can lead to a lower credit score.
It Affects Your Loan Approvals
Banks, credit unions, and other lenders do check your credit utilisation to assess how well you manage your debts. A low credit ratio gives a good impression of your credit profile to the lender.
How to Improve Credit Utilization Ratio
Pay Your Bills Frequently
Pay your bills before you get too close to reaching your high balance. Paying off your debts before your balance gets too big will help you maintain a low reported credit utilization rate. Always ensure you pay the minimum required amount. Knowing how lowering credit utilisation affects credit scores may inspire you to keep your balances in check.
Manage Your Existing Credit Accounts
Exercise caution with your current credit accounts. If you already have several credit cards, dividing your balances among them may help lower your utilisation on each card. Nonetheless, refrain from opening additional credit accounts just to improve your utilization ratio.
Set Balance Alerts
Set alerts with your financial institution to help you track your credit card balance and ensure your credit utilisation rate stays below 30%.
Think Carefully Before Closing Old Credit Cards
When you close your credit card, it lowers your available credit limit. Keep your old credit cards open to maintain a high credit limit.
Conclusion
Credit utilization may seem like a minor aspect of personal finance management; however, it can affect your credit rating. Having your balance significantly lower than your credit limit demonstrates that you can use your credit effectively without becoming over-reliant on borrowed money. However, achieving a ratio below 30% is a realistic goal for most Canadians. Ultimately, keeping credit utilisation low, making prompt payments, practising sound borrowing, and managing personal loans responsibly will help you maintain your credit rating.
Frequently Asked Questions
Is 700 a poor credit score?
A credit score of 700 is not considered poor in Canada. Canadian credit scores usually range from 300 to 900:300 to 599- Poor
600 to 659- Fair to Good
660 to 724- Good
725 to 759- Very Good
760 to 900- Excellent
How do I check my credit score without hurting it?
You can check your credit score through trusted apps without hurting your score. However, pulling your own credit report and credit score is not a negative inquiry; hence, it will not affect your credit score. Applying for a new credit account is a negative inquiry that may affect your credit score.
How to remove false credit information?
To remove incorrect information from your credit report, you must dispute the error directly with the credit reporting agency and the company that provided the information.
Can I wipe my credit history?
No, you cannot wipe or completely erase official credit entries.
Comments