How Does Credit Utilization Affect Credit Score?

How Does Credit Utilization Affect Credit Score?

Posted on March 27, 2023

We talk a lot about credit scores in auto finance and credit utilization forms part of that score. So, what is credit utilization and how does it influence your overall score? Our Simcoe auto loan team finds out!

Alongside your payment history, debt to income ratio, credit mix, account ages and a few other factors, credit utilization helps make up your credit score.

What is Credit Utilization?

This is a measure of how much credit you’re using at the time versus how much you have available. It’s a convoluted measure but it factors into all credit scores so is worth getting your head around.

For example; say you have $20,000 worth of credit available and have $2,000 outstanding on a credit card. Your credit utilization would be 10% as you have used 10% of the available credit you could access.

If you have multiple credit cards and other debts, they are added together and then calculated as a percentage.

So that $20,000 credit availability with two credit cards with $2,000 on each would mean a total of $4,000 being used and 20% utilization.

How Does Credit Utilization Affect Credit Score?

Your credit score is a measure of how much risk you present as a borrower. The less risk you present, the higher your score. As we mentioned, your payment history, credit mix and other elements make up the score as they all paint a picture of your creditworthiness. Click here to learn more about the influences of credit sore.

Credit utilization factors into this because it can show a potential lender how much debt you already have. In the example above, if you already had $4,000 of credit card debt and were just about making payments, the lender would have to think carefully about whether you could afford more debt.

The same for if you had no debt. You would be more able in theory to manage an auto loan because you have no other debt outgoings.

There is no hard rule for credit utilization but most lenders consider 30% to be a safe limit.

That means not exceeding 30% of available credit as much as possible. While a lender won’t refuse an auto loan application if you have more, they will look very carefully at your overall situation.

Credit Utilization & Car Loans

If you have more than 30% credit utilization and need an auto loan, don’t let it stop you applying. Discuss your needs with our Simcoe auto loan team and we can work with you to prequalify and then apply for the best loan we can find.

We work with a range of lenders who consider applications from all walks of life. They look further than the credit score and consider the wider picture, including affordability. If you have high credit utilization but can afford more borrowing, you can find you a loan.

Contact Unique Chrysler for help, advice and competitive Ontario car finance.