Understanding credit utilization when using a crypto rewards card

Credit utilization refers to the percentage of available credit being used. If a user has a $5,000 credit limit and a $1,000 balance, their credit utilization rate is 20%. The Financial Consumer Agency of Canada says it is generally better to use less than 30% of the available credit.

Credit utilization is a mathematical formula that explains the percentage of available credit being used. It is commonly calculated by dividing the credit card balance by the credit card limit. For example, if a credit card has a $10,000 limit and a $2,500 balance, the credit utilization rate is 25%.

Credit utilization can apply to one card or across multiple revolving credit accounts. This matters because it can affect an individual’s credit score. TransUnion Canada, for example, lists “how much credit you use compared to the amount of credit you have available” as a factor that may affect how it calculates a credit score.

A high utilization rate can suggest that an individual is relying heavily on available credit. A lower utilization rate may suggest that the borrower is using credit more conservatively.

A crypto rewards credit card is like any other credit card and has a credit limit. When a user makes a purchase, the balance increases. When they make payments, the balance decreases and available credit is restored.

The fact that rewards are paid in crypto does not change how utilization works. The card issuer is likely to report account activity to one or both major credit bureaus, and balances may still affect the cardholder’s credit profile.

For example, assume your crypto rewards credit card has a $6,000 limit. If your statement balance is $1,800, your utilization rate on that card is 30%. If your balance rises to $3,000, your utilization rate becomes 50%.

Even if those purchases earn crypto rewards, the higher balance may still impact credit utilization.

Credit utilization is calculated by dividing the credit card balance by the credit card limit and multiplying the result by 100.

For example:

$1,000 balance ÷ $5,000 credit limit = 0.20.

0.20 x 100 = 20%.

The same formula can be used across multiple credit cards by adding up all credit card balances, all credit limits, and then dividing the total balance by the total limit.
 

Paying the balance in full by the due date is important because it can help avoid interest charges. However, it may not always mean that the utilization rate reported to credit bureaus is low.

This is due to timing. If the issuer reports the balance before the user makes a payment, the credit report may still show a higher balance for that cycle. Users who want to keep reported utilization lower may consider making payments well in advance before the statement closes, especially after larger purchases.

Credit utilization can be confusing because a card’s current balance may not be the same as the balance that appears on a credit report.

The current balance refers to what a cardholder owes at a specific time. The statement balance is the amount shown on the monthly credit card statement. Credit card issuers may report balances to credit bureaus at different points in the billing cycle, often around the statement date.

This means a cardholder could pay their balance in full every month and still show a higher utilization rate if the reported balance was high at the time the issuer sent information to the credit bureau.

For this reason, some users may choose to make a payment before the statement date, especially after making larger purchases. This can help lower the balance that may be reported for that billing cycle.

Crypto rewards may make everyday spending feel more rewarding, especially for users who prefer the crypto cashback component over points or other benefits. Naturally, rewards of any kind should not be a reason to spend more than planned.

If a cardholder carries a balance over several months, interest charges may outweigh the value of any rewards earned. This is not unique to crypto rewards, although the impact could be magnified. Crypto rewards may rise or fall in value after they are received, unlike cashback which is fixed in Canadian-dollar terms.

The responsible approach is to treat crypto rewards as a benefit on purchases that were already planned and not as a reason to increase spending.