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Know Your Borrowing Power: Credit usage explained

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When it comes to borrowing money, it can be difficult to know you’re getting the best deal available to you. That’s why we created  Borrowing Power, a 1-10 Zopa rating, that gives you a clear picture of your financial health, along with tailored recommendations of how you could improve if it needs a little TLC. Even better, it shows you which rates you could borrow at with Zopa, and the rates you could unlock if you manage to improve your Borrowing Power. Representative APR 9.9%. 

Lots goes into calculating that rating, so we’ve asked Laura Whateley,  award-winning financial journalist and author of Money: A Users’ Guide, to explain some of the key factors that affect it.  

You might have been offered a credit card with a generous limit of several thousand pounds, and feel confident you could repay it all off in full the following month. So why is it such a bad idea to max out the plastic on, say, that weekend in Miami you really fancy?  

When assessing whether or not you are a reliable person to borrow money, be that for a bank loan, a mobile phone deal, or a mortgage, a lender will want to know that you can repay it in full over the duration of the loan term and on time in line with your agreed payment plan – such as monthly installments. Part of the decision involves looking at how well you are borrowing money at the moment, most significantly your “credit utilisation”.  

So, what is credit utilisation? 

This is how much credit you are using relative to how much you have available to you. 

If you have a credit card that has a credit limit of £1,000 and you go on each month to spend the full £1,000, your credit utilisation on that card would be 100 per cent. Spend only £500, and it falls to 50 per cent. 

The 30% rule 

Those in the know say that in order for your credit utilisation to present you in the best possible light, you should apply the 30 per cent rule: never spend more than 30 per cent of the credit that is available to you. Some suggest lower, no more than 25 per cent, ideally the lower the better. It is a fine balance, however, because if you don’t spend any money on cards at all, it can be hard to prove you are able to pay them back on time. 

Credit rating agency Equifax suggests using anything between 50 per cent and 75 per cent of your credit limit will show up an amber flag on your credit report, impacting your credit score and the borrowing deals available to you on the market. Using more than 75 per cent shows a red flag, and will have an even greater negative effect on your credit score.  

If you are able to control yourself in order to spend only a third or a quarter of the “free” money available to you, then you are seen to be a good financial bet. The opposite is true if you just can’t resist going for it on the credit cards and overdraft each month. A lender will be concerned you are someone who struggles to create good financial habits and may find themselves in trouble if they were offered more debt products. 

Add up all the borrowing products you have 

Be aware that credit utilisation doesn’t just apply to one card or loan. You need to add up all the debt products you have. 

For example, if you have three credit cards, each with a £1,000 limit then your available credit is £3,000. If you spend £1,000 on one card, but £0 on the other two, your credit utilisation rate looks much better, falling down to just over 33 per cent. 

3 ways to improve your credit utilisation 

 Have more than one credit card or loan 

This tip comes with a warning – it might backfire so proceed with caution – as, having a huge amount of available credit over many credit cards, may put a lender off offering you yet more debt that it might deem you couldn’t handle. They don’t like to see that you have lots more available credit than you do monthly income. Also, be careful if you are opening new products to space out the process, too many credit applications made in a short time period reflects badly.  

Something that might work for you it to is have a handful of cards and keep your borrowing below about 25 per cent on each of them.  

2 Pay down your debt 

Paying down debt is both a useful way to improve your credit utilisation and the most efficient way to save money. There is little point in having lots of cash in savings accounts paying poor rates of interest if you also have outstanding debt on cards. So consider using cash savings to improve your credit utilisation rate. 

Even if you do not use your credit card, and it has been sat at the back of your drawer for years –  you might have even cut it up – it will still be taken into account when a lender credit scores you. 

3 Close down unused cards 

If you have many unused credit cards with big limits, consider closing them down by contacting the credit card provider. Do it gradually, though, or risk a sudden spike in your credit utilisation rate just as you are hoping to apply for a loan.  

Laura Whateley is a freelance writer and author of Sunday Times bestselling book Money: a user’s guide. She has written for a wide variety of publications including The Times, The Guardian, Grazia, Refinery 29, Elle and Stylist Magazine. All views are Laura’s own.