One of the most important factors that can affect your credit score is credit utilization, but many Canadians don’t know what it is! Did you know your credit utilization determines 30% of your credit score? If you’re looking to understand and improve to buy a house or get a loan, you need to pay attention to how much of your available credit you’re using.
Your credit utilization is the amount of credit you've used out of the total amount available to you. The lower your credit utilization, the more attractive you are to lenders.
You can figure out your credit card utilization in Canada by dividing your total credit card debt by your total limit. For your overall credit utilization, just add up all your cards and lines of credit, including home equity lines of credit, and divide them by your total credit limit.
For example, if the balance on your credit card is $500 and your credit limit is $1,000, then you have a high credit utilization, with a rate of 50%. We recommend keeping your it below 30%.
4 Steps to Calculate Your Credit Utilization Rate:
Step 1: Tally all your balances from all your credit cards
Step 2: Tally the limits you have on all your cards
Step 3: Divide the total balances you have by the total credit limit
Step 4: Multiply by 100 to get your ratio as a percentage
Carrying large balances on your credit cards suggests you’re not able to pay them off in full, credit bureaus see this as an indication that you might have problems paying bills in the future. If for example, you’re relying on your credit to cover your regular expenses, once your credit cards are maxed and the lines of credit are used up, you may not be able to cover loan payments.
We recommend keeping your utilization below 30%. Credit providers and financial institutions will see your low ratio as responsible credit use. So if your credit card limit is $5,000 and your balance is $1,250, your utilization is 25%.
There are two main ways that you can improve your credit utilization and luckily, they are pretty simple.
Minimize your account balances
The best way to improve your score is by minimizing the balances you owe on your credit card accounts. To do this, you should try and pay off your balance in full each month.
If you’re having trouble meeting your monthly bills (payment history makes up 35% of your score), you may want to consider debt consolidation or a low-interest personal loan. Loans don’t count towards your credit utilization because they’re a form of instalment credit: you’re approved for a set amount, which you pay off through fixed payments over time.
Since credit card interest on missed payments usually exceeds 19.9%, you’ll likely receive a lower interest rate on a personal loan and save money in the long run. You can use our loan calculator to see how much you could save on a monthly basis.
Increase your credit limit
Another way to improve your utilization rate is to ask your credit card company to increase your credit limit, or you can apply for another credit card. This is called a balance transfer. If you can handle credit responsibly without overspending, this is a great option. The goal is to increase the total amount of credit available to you and not to add to any existing debt you may have.
A transfer balance is when you repay or 'transfer' one credit card debt to another card. There are three reasons you might want to consider this as an option:
If you’re transferring between existing accounts, it typically doesn't affect your credit score, however, if you open a new card the ‘average age’ of your credit accounts will decrease.
Credit history is a part of your credit score, however, payment history and credit utilization have a bigger impact on the scoring model, meaning a balance transfer may be a good option depending on your situation.
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If you are looking to improve your credit score there are lots of ways you can start building positive financial habits and a more stable financial future. If you aren't already a member, you can get your free credit score and track your progress as well as accessing personalized recommendations and advice.
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