Will your credit score decline if your credit utilisation is 0%?

The credit bureaus consider several factors when they calculate your credit score, including your credit usage and habits. But what happens if you have access to credit, and you don’t use any of it?

We consider the impact this has on your credit score, along with credit limits and how credit utilisation works.

Tip: Get your free credit score today through CreditSav.

What is a credit limit?

When you take out credit, or open a credit-bearing account, you will receive a credit limit, or a maximum amount of credit that’s available to you.

Each credit provider will review your application and, if they decide to approve it, they will inform you of the conditions that will be applicable. They might, for example, tell you that your interest rate is 17% and you have a credit limit of R10,000.

Creditors make these decisions based on what you can afford, which is deduced largely from your credit score and income.

READ MORE: Is it worth taking out debt to build your credit score?                   

What impact does credit utilisation have on your credit score?

According to Sebastien Alexanderson, CEO of National Debt Advisors, every credit bureau has a different approach to calculating your credit score and how they present that information.

“The basics are simple. You need to be an active credit user with good payment history in order to grow your credit score and lower your risk profile,” says Alexanderson.

The bureaus also consider how much of your available credit you use. Imagine you have three credit-bearing accounts valued at R500, R1,200 and R5,500, which gives a total credit limit of R7,200.

Ideally, credit bureaus want you to only use a portion of the credit available to you. If you max out your credit, it will appear as though you’re desperate for money and your credit score will drop.

“Not having credit, or not reaching your credit limit, means your credit score should also remain stable and should not be affected. However, it also means you won’t have a growing score,” Alexanderson explains.

If you make use of 30% of your overall credit limit (using our example, R7,200 * 0.3 = R2,160), your credit score will grow, as long as you pay off the R2,160 diligently. Being around the 30% mark doesn’t make your credit score grow independently, but it won’t decrease it either. 

However, if you use 70% of your overall credit limit (R7,200 * 0.7 = R5,040) your credit score will be clouded by the large amount of debt you’re relying on. If you meet your monthly obligations, your credit score might still go up. But it will be slightly hampered by your excessive use of credit.

Therefore, it’s best to have a credit utilisation between 0% and 30%. This will pair well with your diligent payments, and your credit score will grow steadily.

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