Even though credit cards are so widely used in Canada, many people may lack a good understanding of exactly how credit cards work, or how the way they use their credit cards could impact their financial health. This lack of knowledge could end up causing people to make decisions that lead to lifelong consequences. Unfortunately, this is bad news because many people have to turn to high-interest credit options in order to keep up with the rising cost of living, according to the Financial Health Network.
One of the more crucial factors that credit bureaus and lenders look at when evaluating your creditworthiness is your credit utilization. Your credit utilization refers to the percentage of credit available to you that you are currently using. For example, if you have a credit card with a limit of $10,000 and you use $4,000 of your limit, you have a credit utilization of 40%. According to TransUnion, which is one of the major credit reporting agencies in Canada, it is recommended to keep your credit utilization rate below 30%.
How does your credit utilization impact you?
Your credit utilization can impact you in multiple ways. If your credit utilization is high, so over 30%, it could actually lower your credit score, which many lenders, landlords, and even some employers look at to make decisions about you. Having a low credit score could limit the amount you are able to borrow in the future, and it could even cause your interest rates to increase, which would only put more strain on your finances. By keeping your credit utilization in a healthy range, you will be demonstrating to lenders and anyone else interested that you are responsible with your credit management. And it could increase your chances of being approved for lending applications, such as a mortgage.
Here are some tips to manage your credit utilization.
Keep an eye on credit card balances 👀
In order to make sure you are responsibly managing your credit and not over-utilizing it, monitor all your credit balances. By regularly reviewing your credit card balances, you can make better decisions about how you are using your credit, and ensure you're staying within the recommended usage of 30%. Sometimes people can fall into a trap when they get a credit card and believe it's free money, so they end up spending recklessly. This could cause you to use more than 30% of your available credit. You could even max out the card and have a hard time paying it all back. By building a habit of regularly checking your credit card balances, you can stay on top of your usage before things get out of control.
Pay off balances on time 🕔
Paying off your balances in full and on time demonstrates that you pay your bills, and you will not end up building a higher credit card balance month after month. If you are using your credit card often and not paying off the full balance, it could be more difficult to keep your utilization rate below an amount that won't negatively impact your credit health. If you only pay off the minimum every month, the interest charges could be adding to your debt. If you aren’t able to pay off the balance in full each month, ensure you pay at least the minimum payment. You can also make multiple, smaller payments throughout the month to get the entire balance paid off.
Increase available credit with caution ⬆️
If you use your credit card often to make large purchases or to book hotels or vacations, you may want to consider increasing your available credit. But be careful. Assess your current financial situation. Ensure that you will be able to pay off any purchases you make with the credit in full, and on time before requesting or taking an offer to increase your credit limit. Don’t increase your limit and then spend more than you’ll be able to pay back. The benefit of increasing your available credit is that you will have more breathing room to keep your credit utilization under the recommended amount. This way, large purchases or emergencies will not negatively impact your credit health.
Better manage debt 📒
If you have multiple credit accounts that all have balances, it may be difficult to keep track of how much credit you are actually utilizing. So try to consolidate your debt into one place and, ideally, it should be the account with the lowest amount of interest. By having all your credit in one place, you can more easily monitor it and ensure that your balance is within a healthy utilization rate. Having your credit card debt consolidated in one place will also make it easier to repay it because you will only have to worry about one bill. And it lessens the chance of accidentally forgetting a bill and defaulting.
It can take time to learn how to responsibly use a credit card, but this practice can go a long way. Keeping your credit utilization rate low can help your overall financial health, and possibly make it easier for you in the future to get approved by lenders. Credit card debt causes stress in many people's lives, but it's never too late to get on the right track. Reaching out to financial professionals, such as a Certified Cash Flow Specialist, or seeing if your employer or institution has any helpful financial wellness resources is a great place to start.
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.
About the Financial Capability Program (FCP)
The FCP combines quick and practical lessons with tools, including Winton, which helps people make financial changes they can stick to. Users can apply what they've learned to their financial situation, thus bridging the knowing-doing gap. The goal of the FCP is to help people get more life from their money.