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A guide to your credit card utilization rate and why it matters

Posted on 6 August 2023

Written by Chris Galea

Credit cards are an invaluable tool for millions of Canadians. They provide convenience, safety, and allow you to make purchases without having to physically carry cash around with you. Being savvy with credit cards, however, extends far beyond simply signing, swiping, or entering your chip and pin. Responsible credit card users should be aware of their credit card utilization rate, and understand what it can mean for the health of their financial situations. While most of us are aware that making credit card payments on time is essential to building a strong credit score, credit card utilization is also a key factor. In Canada, credit card debt is at an all time high, with the average balance being $2,121 in 2022. This means it is more important than ever that Canadians understand their credit card utilization rate, and know how to manage it. In this article, we explain what a credit card utilization rate actually is, why it matters, and how you can take control of it.

What is a credit card utilization rate?

Also sometimes referred to as a credit utilization ratio, a credit card utilization rate is the revolving credit you are using, divided by the total amount of credit you have available and multiplied by 100. It is basically what you owe divided by your credit limit, as a percentage. An example is owing $5,000 on a credit card, but also a credit limit of $10,000. This means your credit utilization rate is 50%, and you are essentially using half of the credit available to you. As well as being able to work out an overall credit card utilization rate, you might wish to calculate it for each of your credit accounts, which is also known as a per-card ratio. Credit card utilization rates are an important factor used by credit scoring models to understand how trustworthy you are to repay the credit you owe.

Why is a credit card utilization rate important?

Credit card utilization rates form an important part of your credit score. Models will often consider it when calculating your credit score – in fact, it can impact up to 30% of a credit score, making it pretty influential. If you have a low credit card utilization rate, you are demonstrating that you are using less of your available credit. This generally sends the message to credit bureaus that you are doing well at managing your credit, and not overspending. This could help to lead to a high credit score, which in turn will make it easier for you to gain additional credit like a mortgage or car loan. If, on the other hand, you are using a lot of your available credit, the opposite message could be spent – you might be spending beyond your means, which could lead to a lower credit score.

What are the benefits of a low credit card utilization rate?

Here are the key advantages of being cautious of your credit card utilization rate, and keeping it as low as possible:

  • Credit score: as explained, your credit card utilization rate forms an important part of your credit score. A low utilization rate can raise your credit score, and vice versa.
  • Perception from lenders: when applying for new credit, lenders will look at your credit utilization rate to see how responsible you are with credit. If you have a high utilization rate, it may suggest you are facing financial difficulty. Lenders might think you are a riskier borrower as a result.
  • Creditworthiness: having a low credit card utilization rate implies that you are responsible with your credit. It suggests that you do not rely on credit which is more desirable for lenders.
  • Interest costs: a higher utilization rate will typically lead to a higher interest rate when you take out credit. Equally, if you have a high balance on your credit card, you will be charged more interest than you would for a lower balance.

What is a good credit card utilization rate?

Typically, a good credit card utilization rate is considered to be 30% or less. That said, the lower it is, the better. In order to maximize your credit score, you may want to aim to keep your utilization rate at 10% or less. If you had a $5,000 credit limit, this would mean keeping your credit card balance at $500 or less.

Tips for managing your credit card utilization rate

If you want to know how to better manage your credit card utilization rate and keep it as low as possible, we share our top tips below:

  • Monitor your credit card balances so you are aware of the amount of credit you are using
  • Rely less on your credit cards, unless you can repay in full – a debit card or cash are good alternatives
  • Pay off your credit card balances in full and on time each month – this will also help you to avoid paying interest
  • Spread out your spending across your credit cards so that you maintain a lower credit card utilization rate on each
  • Do not close old credit cards. This can reduce the amount of credit available to you, and can increase your utilization rate. Keep them open to show a prolonged credit history
  • Ask for a credit limit increase. Only do this if you are able to use credit responsibly, but doing so from time to time can lower your credit card utilization rate

It is a good idea to see where your credit score is at by checking your credit report – it is free to download once a year, and you can check any activity and changes in your credit card utilization rate. Although your rate may be difficult to lower straight away, by consistently applying the above tactics, you can reduce it over time.

Understanding your credit card utilization rate is important for improving your credit score and financial circumstances in general. Keeping it low can help you qualify for more credit, and save on interest on any balances you owe. If you are struggling with your credit score and want advice from the experts, book a free consultation with Spergel. Our experienced Licensed Insolvency Trustees have been helping Canadians gain debt relief for over thirty years, and we are here to help you too.

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Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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