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What is credit card utilization?

By Leah Ryder

Credit card utilization isn’t a term that gets a lot of attention compared to concepts such as credit scores and credit reports.

However, don’t let the fancy terminology fool you. Credit card utilization can be surprisingly simple to grasp - and it could be the key to a healthier relationship between you and your finances.

What is credit card utilization?

Credit card utilization, or CCU, is a rate that indicates how much of your available credit you’re using.

To calculate it, divide your total credit card balances (how much you owe) by your total credit card limit (how much you could spend).

So, if you have a $2,000 credit limit, and you have currently have $800 worth of purchases on your credit card, your CCU rate is 40 percent. This is above the 35 percent or below that the Financial Consumer Agency of Canada recommends.

The credit bureaus typically factor CCU into their scoring models to calculate your credit score.

How credit card utilization can affect your score

If your credit card utilization is too high, lenders and the credit bureaus may consider you a greater lending risk – and less likely to repay your debts.

According to TransUnion Canada, if you’re using more than 35 to 50 percent of your available credit, it may negatively affect your credit score.

As Heather Battison, vice president of TransUnion Canada explains, “Credit utilization is a key part of your credit score because it shows lenders your ability to responsibly manage and pay down debt.”

The reverse is also true. “If you’re using the majority of your available credit, this can negatively impact your score because you could appear risky to lenders who may question your ability to pay back your loans,” Battison says.

However, Trevor Gillis, associate vice president of account management for TD Credit Cards adds, “every customer situation is unique, and CCU is just one factor used to understand a customer’s financial circumstances.”

Steps toward better credit card utilization

So how do you hit the right balance?

You want to strive to keep your credit utilization rate below 35 percent.

However, this doesn’t mean not using your cards at all. It’s just as important to build a positive history of credit card use as it is to be responsible with having that credit available.

Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada explains: “How can lenders assess your creditworthiness if you have no history whatsoever?”

If you’re worried about using credit cards but you still want to build a positive payment history, consider putting a small, monthly subscription on your cards and setting up autopay so the balance is paid off each month.

Staying within a good CCU range could involve making multiple card payments throughout the month in order to manage your balance better – this can also help ensure you never miss a payment.

Whenever you can, make full payments for the amount due each month, even if you split the full amount among multiple payments.

But what if you have trouble keeping your CCU below the prescribed 35 percent?

From a lender’s perspective, regular on-time payments can be key if you have high credit utilization, Gillis says.

“For a financial institution to decide whether a customer with a high CCU could be approved for another loan, it would also consider whether the customer paid their balance in full every month or only made the minimum payment, and whether the payments were made on time,” he says.

Should I cancel my credit card to improve my utilization?

When it comes to utilization, it’s better to work on payment strategies than to eliminate credit as a method of debt prevention. Cancelling cards or reducing limits can actually increase your credit utilization and, subsequently, lower your credit score.

Instead, if possible, you may want to focus on increasing your credit limit in order to lower your utilization (if your current spending remains constant).

There are a few ways to go about increasing your limit:

• You can schedule an appointment with your banking representative or contact your credit card’s customer support to inquire about increasing the limit on your existing cards. Granting the increase is entirely at your bank’s discretion but you may have a better chance if you’ve been with your bank for a long time and have a positive payment history.
• You may want to research new or alternative card options that align with your current spending (for example, a credit card that you can earn airline miles if you travel frequently). However, remember that applying for a new credit card will result in a hard inquiry, which can ding your score.

Bottom line

Maintaining your credit utilization at 35 percent or below is one key factor that contributes to your overall credit health, in addition to making full, on-time payments and keeping new credit account applications to a minimum.

Still have questions? Contact us.
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