Do you know what the '30% rule' is when it comes to using credit? As it turns out, many people either aren't aware of it or are ignoring it, which risks damaging their credit score. This, in turn, could make it much harder down the line to get a competitive deal on a loan, credit card or mortgage.
Both credit cards and overdrafts come with a credit limit – the maximum amount that a provider is willing to lend you. The more of your credit limit you use up, the bigger the impact on your credit rating.
As a general rule, using about 30% or less of your allowed credit limit is considered sensible – and if you keep up with your repayments could actually improve your rating – while using up more than 50% could very well have a negative effect on your score.
This is according to ClearScore, who found that more than 18 million Brits (37%) are using over 30% of their credit limit, with 78% among these even using more than 50%. This may not be a problem if people manage to repay their debt every month without fail, but further statistics show that 43% have missed a payment in the past 12 months, while 12% have missed several.
"It's worrying that so many people are missing payments and putting themselves at risk of damaging their credit history," commented Michelle Highman, CEO of The Money Charity. "Whenever you use credit, it's important to make sure you can pay back the money. Create a budget and work out what you can really afford. And make sure you know what happens if in the future you find you can't make the payments."
This advice seems to be most useful for people in the Colchester area, as they use the highest percentage of their credit limit at a whopping 118%. This is followed by Newport, where people use an average 84% of their limit, while Bath is also in the danger zone at 70%. In contrast, borrowers in the City of London were only found to use an average 38% of their limit – the lowest in the country.
"Most people need credit at some point in their life, for example to buy a home or a car," Justin Basini of ClearScore stated. "To maintain a good credit score, our advice is not to use too much of your credit limit – as a guide, stick to less than 30% to show lenders you can manage your credit sensibly. If you are using more, don't take out multiple credit cards and use 30% of each, as this will do further damage to your credit score. The key is to make a plan to repay your balance every month, which will have a positive effect on your score."
If you're not sure what your credit score is, you can find free trials or credit score providers by clicking here. To improve your rating, you could use a credit repair card or read our guide on the subject. To make sure you can keep up with repayments, you'll want a competitive bank account with overdraft or credit card – whichever may apply.
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