Lots of credit going unused in UK

By Emma Lunn

UK cardholders appear to be refraining from maxing out their credit cards, as well as avoiding late payments, according to figures from credit scoring company FICO.

FICO data reveal that 33% of available credit on UK credit cards remains unused. Despite many card issuers reducing credit limits since 2008, more than £50 billion of credit remains available to UK borrowers. Is this a good trend or something cardholders need to be wary of?

Advantages and dangers
There are pros and cons to having such a large amount of credit unspent and available, said Nigel Brayne, senior director of global business consulting for FICO, in a statement.

"On the positive side, this indicates that many people have a solid ‘cushion' in the event of financial hardship," he said. "On the negative side, card issuers must hold capital in reserve against open credit limits, so the unspent card limits also reduce the amount of capital lenders can make available to consumers for personal loans, auto loans and mortgage loans." unused-credit

In addition to having fewer loans available to them by leaving credit untouched, consumers could be opening themselves up to fraud. Often, large amounts of unused credit are due to cardholders leaving their cards inactive for a long period of time, according to FICO. Some may not have needed to borrow money, while others may have switched to other forms of borrowing, or repaid their balance in full, but not closed their accounts. The cards in their wallets eventually expire -- and, when that happens, the issuer will send out a replacement card. If the cardholder has moved and not updated the issuer, the card may get sent to an out-of-date address, increasing the risk that it can be used for fraud.

Meanwhile, on the plus side, unused credit can be good for your credit score, says James Jones, head of consumer affairs at credit reference agency Experian.

"Not using all of your available credit generally tells a good story about your financial situation," he says. "If possible, we recommend keeping the balances on revolving credit products -- credit cards, charge cards and store cards -- to below 30% of your limits."

Still, having too much unused credit may give some lenders concerns about your ability to borrow too much money.

"We obviously can't comment on individual credit card providers' policies, but what we do know is lenders are looking more at the total credit exposure an individual may have to reduce the risk of consumers becoming over-indebted," says Neil Munroe, external affairs director at credit reference agency Equifax.

In other words, having a lot of available credit means you could potentially get into a lot of debt -- meaning lenders might be hesitant to give you more credit.

The bottom line
Using your credit limit to your advantage is a delicate balancing act. On one hand, unused cards can leave you open to fraud. On the other, using as little available credit as possible can boost your score. On yet, having too much available credit makes you look risky to lenders.

So how can you maximise your credit rating? If you truly plan to never use a particular card again, close the account to reduce the risk of fraud. However, if the card has a long, healthy history associated with it, consider keeping it open and making a single charge per month. Keep your balance across all your cards below 30% of your limit.

At the same time, avoid opening cards unnecessarily. Think twice before signing up for yet another retail credit card, for example, and, before getting a rewards card, consider whether you will actually use it after receiving the sign-up bonus. Avoid applying for several new lines of credit in a short period of time.

This way, you will have credit when you need it, while not cluttering your credit portfolio with unneeded accounts.

See related: If a thief steals your credit card, will your bank refund you?, Credit counsellors share consumers' biggest credit mistakes

Published: 5 March 2013