Credit Utilization Ratio Explained for Canadians

What is Credit Utilization?

Credit utilization measures the amount of credit you’ve used relative to the total amount available.

It’s used in the context of revolving credit products, like credit cards and lines of credit, and is typically expressed as a ratio.

Your credit utilization plays a pivotal role in determining your credit score – it accounts for 30% of your total score.

The lower your credit utilization, the more choices you have when shopping for loan products, along with favourable interest rates.

As a result, being mindful of the amount of credit you use regularly is prudent.

Calculating Your Credit Utilization Ratio

Determining your credit utilization ratio is straightforward and consists of three steps:

Step 1: Add the total outstanding balance of all your revolving debt.

Step 2: Add the credit limits associated with each account.

Step 3: Divide your total debt by your combined credit limit and multiply by 100 to obtain your credit utilization as a percentage.

Below is an example that illustrates this calculation, assuming you have two credit cards and one line of credit:

Loan product Credit card #1 Credit card #2 Personal line of credit Total
Balance $350 $1,200 $5,000 $6,550
Credit limit $1,000 $3,000 $10,000 $14,000
Credit utilization 35% 40% 50% 47%

As you can see, your approximate credit utilization is 47%.

The calculation is essentially a weighted average of the three credit products.

You can determine the credit utilization of each individually, too, as shown in the table.

Did You Know?

Credit bureaus evaluate the credit utilization ratio of each account you own and the combined total of all accounts when calculating your credit score.

Strategies to Better Your Credit Utilization Ratio

As mentioned, credit utilization has a tremendous influence on your credit score.

The reason is that a large balance on your credit card or line of credit indicates a tendency to overspend and difficulty managing debt, which increases the risk of missed payments and default.

When lenders review your credit report, they’ll be more likely to classify you as a high-risk borrower.

As a result, you’ll face more hurdles in securing financing.

It would help to aim for a credit utilization ratio between 30% and 35% as a rule of thumb.

Here are some strategies you can implement to hit that target:

Pay Down Your Debt Faster

Don’t just make the minimum payment when the due date rolls around if you primarily use credit cards.

Strive to pay all or most of your outstanding balance, which will work to shrink your credit utilization.

You’ll incur interest charges by paying only the minimum and carrying your balance into future periods, as interest reduces your credit limit.

Thus, your credit utilization ratio will increase further.

Reduce Your Spending

A concerted effort to reign in your spending will go a long way toward improving your credit utilization ratio.

Take some time to evaluate your spending habits and create a budget you can follow to ensure you don’t rack up too much debt.

Consolidate Your Debt

Debt consolidation involves merging your existing debt under a single personal loan.

Ideally, the interest rate on this loan should be lower than the average rate on your credit cards and lines of credit.

This arrangement will enable you to save money on interest charges and eliminate your debt sooner.

Your credit utilization will decrease instantaneously since a personal loan is an installment credit product and doesn’t count toward your credit utilization ratio.

Ask For a Credit Limit Increase

By raising your credit limit, your credit utilization ratio drops instantly.

For example, suppose your credit card has a credit limit of $10,000, and your current balance is $5,000.

In that case, your credit utilization ratio is 50%.

If you can increase your credit limit to $15,000, your ratio falls to about 33%.

Leave Unused Accounts Open

Ensure you leave your credit accounts open once you pay off your balance.

By doing so, you maintain your credit limit, thereby keeping your credit utilization low.

For example, let’s say your total outstanding debt is $10,000 and your total available credit is $28,000, which means your current ratio is 36%.

If you close an account with a zero balance and $5,000 credit limit, your ratio automatically surges to 43% (($28,000 – $5,000) / $10,000).

Apply For a New Credit Product

The more spending power you have relative to your total outstanding balance, the lower your credit utilization ratio.

Thus, applying for a new credit product can be an excellent tactic for reducing it to a reasonable level, as it will expand your total credit limit.

Just be sure to use your new account sparingly.

You’ll likely need to undergo a hard credit check before your application is approved, which may slightly impair your credit score for a brief period.

Key Insight

A 2021 study conducted by Borrowell found that the average credit utilization in Canada was 43.5%.

Stack of credit cards on laptop calculating credit utilization

Frequently Asked Questions

  • What is a good credit utilization ratio in Canada?
  • How much does credit utilization affect credit score Canada?

Mark is a freelance writer who specializes in covering personal finance topics related to investing, mortgages, credit cards, and more.

He is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.