Your credit score can be significantly impacted by gaining an understanding of credit utilisation and learning how to use it to your advantage. Given that it makes up 30% of your credit score, it is an important factor in establishing your credit worth.
Credit utilisation is the revolving credit you’ve used, measured by the amount you owe divided by your credit balance. For example, if you have a credit card with a R10 000 limit and use R3 000, your credit utilisation rate is 30%.
This rate can change according to your spending and repayment habits and mainly applies to revolving credit such as credit cards or store accounts. It does not apply to fixed credit, like home or vehicle loans.
Ayanda Ndimande, Head of Business Development at Sanlam Retail Credit shares insights into what credit utilisation and why it’s so important to manage it through these tips below:
Take initiative
When asking for revolving credit, it’s important to be proactive and carefully assess your existing financial condition, taking into account your income, expenses, and any outstanding debts. This aids in helping you choose a credit limit that you can afford. By proactively asking for a lower limit, you can avoid borrowing too much and lessen your chance of accruing debt that will be challenging to pay back.
“Credit card companies often offer to increase your credit limit after a certain period of responsible usage. While this can be tempting, be cautious about accepting the offer until you’ve done another thorough assessment of whether it’s financially feasible, or if it’ll lead to overspending and struggling to meet monthly limits,” adds Ndimande.
Exercise restraint
Keep in mind that using all of your available credit can lower your credit score because it will result in a higher credit utilisation ratio.
To maintain a good credit score, financial experts advise maintaining your credit utilisation rate around 30% of your overall credit limit. Maintaining a low credit card utilisation rate also lowers the interest you pay, making it simpler to pay off your debt.
More than the minimum is due
There are numerous advantages to paying back more each month than what your bank or credit card provider requires. It lowers your credit utilisation rate, raises your credit score, and demonstrates to lenders that you are an accountable borrower who pays off your loan on time.
“It also helps you save on interest charges over time, allowing you to pay off your debt faster,” says Ndimande.
Keep your credit score safe
Your credit score, which reflects your creditworthiness numerically, is important in all facets of your life, both personal and professional.
According to Ndimande, businesses frequently take a candidate’s credit score into account throughout the employment process because it can give an indication of how financially responsible they are.
