Difference between credit utilisation & debt-to-income ratio

Where debt-to-income ratio looks at what percentage of your total income going towards paying off your debts, your credit card utilisation ratio refers to the percentage of your total maximum credit card limit that is used. So, while similar, they measure different things.

In this article, we explain the difference between credit card utilisation and debt-to-income ratio in more detail.

What is credit card utilisation?

Credit card utilisation rate is the percentage of your total available credit used. This takes into account all credit cards you may have.

To work out your credit utilisation rate, simply divide your current credit card balance by your total credit limit. For example, if you have two credit cards with a £5,000 limit and you spend £1,000 across them both each month, your credit card utilisation will be 20%.

Your credit card utilisation rate will change on a regular basis, as it is based on credit card usage that has no specific term or end date. A credit card is a type of revolving credit, which means you’re able to borrow as and when you need up to a maximum limit and can repay what you owe either fully or partially at any time. You may incur interest charges if you don’t pay off your full balance at the end of the month, though.

Will my credit utilisation impact my credit score?

Yes, your credit utilisation will impact your credit score.

It's recommended you stick to a credit card utilisation rate of around 30% or less. Remember, this applies to the total amount of credit you use across all your cards. So, if you’re considering closing down an old credit card, do consider how this will impact your total credit card utilisation. It’s likely keeping the card open will be better for your credit score as it will help to lower your credit card utilisation rate.

Lenders like to see you are using credit responsibly. If you’re regularly maxing out your credit card, they may see this as a sign of financial difficulty and over-reliance on borrowing money. On the other hand, if you rarely use your credit card, lenders won’t be able to get a feel for how you manage debt. Demonstrating a strong track record of managing revolving credit could show that you’re more likely to pay back what you borrow on time which is often a sign of a good customer.

Lenders, including credit card providers, report into the credit reference agencies on a monthly basis so it can take a little while for your credit report to show the most accurate, up-to-date information. Therefore, if you’re planning to borrow money – whether that be a loan, a mortgage or another form of credit – it could be worth keeping a close eye on your credit card utilisation in the months running up to your application.

How to lower your credit card utilisation

You can lower your credit card utilisation rate simply by spending less on your credit card or by paying off what you owe.

It is possible to open up a new credit card or extend the maximum credit limit on your existing ones to lower your credit card utilisation rate. However, it’s never recommended to apply for credit unless you genuinely need it. A larger credit card limit could encourage you to spend more, which would not only defeat your goal of lowering your credit utilisation, but could also put unnecessary strain on your finances.

What is debt-to-income ratio?

Your debt-to-income ratio is the percentage of your income that is used to pay off existing debt. This could be your mortgage, a personal loan, credit card or any other form of borrowing.

So how do you figure out your debt-to-income ratio? It’s actually relatively simple. Add up all the monthly repayments dedicated to instalment credit and any minimum payments on revolving credit such as credit cards. Then, divide that figure by your monthly gross income to find your overall debt-to-income ratio.

Let’s say your pre-tax income is £2,500 each month but you have monthly debt repayments totalling £1,250. Your debt-to-income ratio would be 50%.

Will my debt-to-income ratio impact my credit score?

No, your debt-to-income ratio is not recorded on your credit history and will therefore not affect your credit score.

However, your debt-to-income ratio will be taken into account during a lender’s affordability checks so it could ultimately impact your ability to borrow money. Lenders need to feel comfortable that any additional repayments won’t put unnecessary strain on your finances. So, if the vast majority of your income is already swallowed up by debt repayments, the lender may feel another repayment is unaffordable for you. However, if you have a good income with minimal demands on your finances, a lender may feel you’re in a strong position to borrow money as the repayments could fit more comfortably into your monthly budget.

It's recommended to keep your debt-to-income ratio below 40% to demonstrate you can manage your finances effectively without being overly reliant on credit.

How to lower your debt-to-income ratio

Lowering your overall debt could help to improve your debt-to-income ratio. You may wish to prioritise paying off your high-interest debts first, as this could save you some money in interest charges.

Of course, increasing your income would also lower your debt-to-income ratio, but we understand this is often easier said than done!

It’s also a good idea to delay taking out any more credit until you have paid off some of your existing debts, as borrowing more money will only serve to increase your debt-to-income ratio. The only slight exception to this rule is a debt consolidation loan. This allows you to borrow all the money you need to pay off your various debts, leaving you with just one monthly repayment to worry about. Our guide goes into more detail about the advantages and potential disadvantages of a debt consolidation loan.

Find out more about how your credit history can impact your ability to borrow

Our personal loan guides explain what a credit file is, how to improve your credit score and how your credit history can affect your ability to borrow. You may also find it helpful to take a closer look at how a lender makes a decision on your loan application.

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