What is a credit utilisation rate?

Some businesses may be surprised when they are being rejected for business credit loans, especially when they’ve never missed a payment and revenue is up. However, when looking at their credit utilisation rate, it all seems to make sense. For some businesses and SME owners, the lifeblood of daily operations for the business is credit cards and lines of credit because they bridge the gap between payables and receivables.

Here, we’ll discuss what a credit card utilisation rate is and what the difference is between being at risk and not. We’ll break down what the credit utilisation rate is, why it is so important for your business credit score, and how you can ensure your business remains ready for growth.

In simple terms, your business’s credit utilisation rate is the percentage that represents how much of your ‘revolving’ available credit you are currently using. Revolving credit refers to accounts like lines of credit or credit cards where you can borrow, pay back, and borrow again. This does not include instalment loans.

The credit utilisation rate formula

There is a way to calculate your credit utilisation rate using a specific formula. The first step is to take your total outstanding balance and divide it by your total credit limit.

Credit utilisation rate = Total current balance / total credit limit x 100

For example, if your business has a credit card with a £10,000 limit and your current balance is £6,000, your utilisation rate is 60%. Even if you have the cash in the bank to pay that £6,000 off tomorrow, the moment that balance is reported to the credit agencies, you are flagged as a high-utilisation user.

Why lenders are concerned with this number

An important thing to remember is that lenders will look at your business credit and use this to make a decision as to whether or not you are a risk. Here’s how lenders will rank your level of risk when it comes to your credit utilisation rate:

Low utilisation (0% - 30%): This shows lenders that you have access to capital but are disciplined enough not to rely on it. This shows you are low risk.
High utilisation (50% - 100%): This will signal to lenders that your cash flow might be stretched, and they will likely think that your business is struggling to stay afloat.

So, when you decide to apply for a major loan, having a high credit utilisation rate can lead to higher interest rates or being rejected. Even if your annual turnover is high enough, this won’t erase the fact that your credit utilisation rate may be too high. This is something that lenders factor as the second most important indicator behind payment history when it comes to deciding if your business is a risk or not.

The 30% rule

30% is the magic threshold within credit management, and once your credit card utilisation rate climbs above this, your business credit score will begin to suffer. Naturally, if you cross the 50% marker, your credit score can face a significant drop.

Scoring models will look at your per-card utilisation as well as your total utilisation, so if, for example, you have one card maxed out at 90% and another one at 0%, the maxed-out card will still drag down your business credit score, even if your overall overage is low.

How to manage your credit utilisation rate

Being able to manage your credit utilisation rate is more than just ensuring you spend less, but also about being strategic with how you manage your debt and how it is displayed to lenders. Here’s how you can manage your utilisation rate effectively:

Request a limit increase (without increasing spending)

One of the quickest ways to lower your credit card utilisation rate is to increase your credit limit. This will directly affect your credit utilisation rate, lowering your percentage. The key here is to ensure that you don’t spend the extra credit, however.

For example, if you have a £5,000 balance on a £10,000 limit, getting your credit limit increased to £20,000 will automatically decrease your utilisation from 50% to 25%.

Note: This may trigger a hard credit check, so refer back to our guide on hard vs. soft checks before proceeding!

Make mid-cycle payments

Another tip in managing your credit utilisation rate is to make mid-month payments. Credit card companies will typically report your balance to the credit reference agencies once a month, so if you spend £8,000 on a £10,000 card and pay it off in full on the due date, the credit referencing agency could still see that balance if they check mid-month. So, by making the payment before the statement closes, you can help ensure that the reported balance is low.

Spread large purchases across multiple cards

If your business needs to pay an expense of £15,000, try not to put it all on one credit card. For example, if you use a credit card with a limit of £20,000, this will give you a credit utilisation rate of 75%. Instead, try spreading it across two or three cards if you can. This will keep your credit card utilisation rate on each individual card lower. This is viewed more favourably by lenders.

Don't close old accounts

You may be tempted to close off a credit card once you’ve paid it off, but this will remove that credit limit from your total credit utilisation pool. This will, naturally, cause your aggregate credit utilisation rate to spike. Instead, keep the account open and use it occasionally.

Managing your lendability

Here’s how you can focus on managing your lendability:

Action	Impact on utilisation	Why it works
Paying down debt	Decreases	Lowers the balance being measured.
Increasing credit limit	Decreases	Increases the available pool of credit.
Closing an old credit card	Increases	Reduces your total available credit limit.
Opening a new card	Decreases	Adds more room to your total credit limit.

Your credit utilisation rate is a number that fluctuates without keeping track of things such as late payments. So, if your credit utilisation rate is high one month, paying it down can result in a better credit score, which decreases your utilisation rate the next month.

By ensuring your balances are low and your limits are high, you’ll be signalling to lenders that your business is stable and responsible and ready for the next investment.

Are you looking to purchase business credit checks? Get in touch with Creditserve for more information today.

What is a credit utilisation rate?