Your Credit Report And Your Credit Card Utilisation Rate
One of the most important aspects analysed by credit scoring models to calculate your credit score which you may not be thinking about, is your credit card utilisation rate, also known as your debt-to-credit ratio. This measures the amount of available credit you are using according to your credit card limits and therefore how much debt you are in compared to the amount of credit which has been extended to you.
Essentially, take your credit card balances (from all of your credit cards), divide that by your total credit card limit (also from every credit card) and multiply by 100 to calculate your credit card utilisation rate. For example, if your combined credit limit is £10,000 and the total balance you owe across your credit cards is £1,000, your credit utilisation is 10% and quite low. In comparison, if your total credit card balance is £4,000, that brings your credit utilisation up to 40%, and although this does not sound that high, many lenders and creditors like to see a debt-to-credit ratio of roughly 30% or less.
With this in mind, be aware and careful of lenders and creditors implementing any reductions or caps to your credit limit which will change your ratio even though you are spending the same amount of money and your total debt is the same. If your credit limit was suddenly reduced to £7,000, and you still kept your balance of £4,000, your credit card utilisation rate would jump to 57% and this would have a big impact on your credit score.
If you do find that your credit limit has been suddenly and drastically reduced, you can try to minimise the impact on your debt-to-credit ratio in a few ways. First, try reaching out to your lender and asking them to reinstate your original limit, reassuring them that you still intend to make your payments and are trying to keep your ratio low. If this doesn’t work, you can try reaching out to a different lender or creditor and asking them to increase the limit on an open line of credit with them, explaining the situation and the reason you are asking for this.
Alternatively, you could consider opening a new line of credit to increase your credit limit, even if you don’t actively use or spend money on it – but keep in mind that if you are rejected for this new credit it will still generate the inquiry on your credit reports.
Has our credit score series made you curious to know more about your credit score?
You can access a detailed copy of your own credit report through CheckMyFile.*
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