Credit utilization is the percentage of your available revolving credit that you are currently using. It is the second most important factor in your credit score in Canada, making up approximately 30% of the total. Understanding and managing your utilization is one of the fastest and most impactful things you can do to improve your score.
Utilization is calculated in two ways by the scoring models:
Example: You have two credit cards. Card A has a $2,000 limit and a $600 balance. Card B has a $3,000 limit and a $300 balance. Your per-card utilization is 30% on Card A and 10% on Card B. Your overall utilization is $900 / $5,000 = 18%.
Both metrics matter. Having one card at 80% utilization can hurt your score even if your overall utilization is low.
High utilization signals to lenders that you may be financially stretched or overly dependent on credit. Even if you pay your balance every month, carrying a high balance at the reporting date tells the scoring model that you are using a large proportion of your available resources. The higher your utilization, the greater the signal of potential financial stress.
The most straightforward method. Pay down your credit card balances, especially on any card approaching or exceeding 30% utilization. This can produce score improvements within one to two billing cycles.
If your issuer increases your credit limit and your balance stays the same, your utilization ratio drops. For example, a $600 balance on a $1,000 limit is 60% utilization. If your limit increases to $2,000, the same balance is now 30% utilization. Note that requesting a credit limit increase may result in a hard inquiry on your credit file.
A new card with a reasonable limit increases your total available credit, which lowers your overall utilization ratio (if you do not increase spending). However, opening a new account creates a hard inquiry and lowers your average account age — so this is a tradeoff. It is most effective if you already have a solid credit history.
As mentioned above, paying down your balance before your statement closing date (not just the payment due date) means your reported balance is lower. This is a practical tactic for people who use their cards heavily but want to report low utilization.
Some Canadians believe that having zero balances on all cards is ideal. In practice, having a small balance ($1 to $10) or just using the card occasionally produces the same or better results than a completely dormant account. Cards that are never used may eventually be closed by the issuer for inactivity, which would reduce your total available credit and increase your utilization ratio on other cards.
Credit utilization primarily applies to revolving credit: credit cards and lines of credit. Installment loans (mortgages, car loans, personal loans) are reported differently. For installment loans, the relevant metric is how much of the original loan you have paid off, but this does not affect your utilization ratio in the same way revolving credit does.
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