What should my credit utilization be? 

Living within your means, and not overspending using credit cards, is critical to your financial well-being. But did you know that using too much credit can not only negatively impact your financial health, but your credit score as well?

It's called your credit utilization rate. But once you learn how to manage it, you'll be able to improve your overall creditworthiness. Let's dive in.

What is credit utilization?

Your credit utilization is the ratio of your total credit available to your total debt on revolving credit accounts, such as credit cards and lines of credit. According to the credit bureaus, a good rule of thumb is to use less than 30% of the total amount of credit available to you to keep your credit score in good standing. Your credit utilization ratio also makes up 30% of your credit score, so it's a good idea to keep your available credit as high as possible – and your debts as low as possible.

So why does credit usage matter, anyway? At its core, credit refers to the ability to borrow money through a credit card, loan, or mortgage with a commitment to pay it later. When you borrow, there's an additional cost involved – interest – which is the price you pay to use a lender's money. Loans can be highly beneficial and can help you invest in your education, home, or business, but they also carry the responsibility of repayment. Being vigilant about paying back credit in a timely manner, and the amount of debt you accumulate is essential, as excessive debt can lead to financial stress and hinder your ability to achieve your long-term goals.

What to know about your credit card limit

If you've ever wondered "how much available credit should I use?" – we've got you covered. Your credit card limits exist to manage financial risk for lenders, and assess your ability to handle debt responsibly. Your credit limit is also a regulatory requirement to ensure fair and responsible lending practices.

Banks and financial institutions may raise your credit limit for several reasons, such as positive credit behaviour, increased income, or to retain you as a valued customer. They may also increase your credit limit to remain competitive or as a response to your demonstrated responsible credit usage.

Your credit card limit may differ from someone else's due to various reasons, like differences in credit history, credit score, income, debt-to-income ratio, and lender policies. Lenders look at these factors when determining how much credit to extend to any individual, and are tailored to individual circumstances. But, no matter what your credit limit is, be wary of hitting the limit, as it can impact your credit utilization and be difficult to pay off.

How do you calculate your credit utilization ratio?

So how can you keep an eye on how much credit you’re using? Here's a step-by-step guide, so you can aim to hit a less than 30% ratio.

Step 1: Tally up your current outstanding balances on your credit cards and lines of credit, which represent all of your revolving debt.

Step 2: Divide this number by the sum of your credit limits, which is the total revolving credit available to you.

Step 3: Multiply by 100 to express the ratio as a percentage.

Here's an example: Let’s say you have one credit card with a $10,000 credit limit, and you currently have a balance of $5,000 on the card. You also have a revolving line of credit with a $10,000 credit limit as well, and you’ve used $2,000 of the line of credit.

Your credit utilization ratio would be 35% ($5,000 + $2,000 = $7,000 / $20,000 x 100 = 35%). In this example, you’re slightly overusing the amount of credit available to you, but your ratio would still be in good standing.

What is a good credit utilization rate?

Canada is an increasingly expensive place to live, but it’s important to aim to keep your credit utilization rate below 30%. That’s because lenders like to see that you can effectively manage credit while making on-time payments, and not rely on credit to cover monthly expenses.

While it's advisable to maintain a ratio that's as low as possible, you also don't want a 0% credit utilization rate because the credit bureaus will find it difficult to assess if you're responsible with credit.

Similarly, if you’re using more than half of the credit available to you (so a 50% credit utilization ratio or 75% credit utilization ratio), you will also set off alarm bells with lenders and your credit score will drop. If you have a maxed-out credit limit, you'd have a 100% credit utilization ratio, and your credit score will be impacted significantly.

Tips to manage your credit utilization

Managing your credit utilization is crucial to maintain a healthy credit score and improve your overall financial well-being. Here are our top tips to help you manage your credit utilization.

• Monitor your credit utilization: Keep a close eye on your credit card balances and credit limits. This awareness will help you control your credit utilization and make adjustments as needed.

• Pay your balances in full: Whenever possible, pay off your credit card balances in full each month to decrease your overall debt load. This will help you avoid interest charges and keep your credit utilization low.

• Reduce unnecessary expenses: The fact is, it's much easier to overspend on a credit card than with cash. Cut down on non-essential spending by identifying areas where you can save money.

• Don't close unused credit cards: If you've paid off a credit card, you may want to close the account to make it easier to avoid overspending. However, that would reduce the total credit available to you, and could impact your credit utilization ratio.

• Increase your credit limit: Consider requesting a credit limit increase from your credit card issuer. A higher limit can lower your credit utilization ratio, but be cautious not to use the increased limit as an excuse to overspend.

• Set up balance alerts: Payments can easily go unnoticed. But the more payments you overlook, the larger your outstanding balances grow. Set up balance alerts to manage your payments and maintain a healthy credit utilization rate.

Build credit and improve your credit utilization with KOHO

Your credit utilization is something to monitor closely. Try your best to keep your credit utilization rate as low as possible, while still using your credit cards to demonstrate how responsible you are with credit.

KOHO offers a secured line of credit that can help you build your credit, and lower your credit utilization. A secured line of credit is a type of revolving credit account backed by collateral, such as a car or savings. Since it's revolving, it will add to the total amount of credit available to you. You can lower your credit utilization ratio by using a secured credit line of credit, repaying it on time, and keeping your balances low relative to the credit limit.

With KOHO's secured line of credit, you choose an amount to set aside, and we'll report that amount as on-time payments to Equifax to help improve your credit score. With the line of credit, you can download KOHO's app, you can track changes to your credit history to see how your score changes over time.