What Is a Utilization Fee?

Utilization Fees Explained

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A utilization fee is a fee that may be charged on a guaranteed loan, or a fee that may be charged on a revolving line of credit when the usage is above or below a certain amount. The borrower is required to pay this fee, and it could be based on the outstanding principal balance or the amount of credit used.

Let’s take a closer look at utilization fees and how they work.

Definition and Example of a Utilization Fee

A utilization fee may also be known as a usage fee. If you have a revolving line of credit, you may be charged this fee when the utilization is above or below a certain minimum. As an individual borrower, this may be the more likely scenario of when you may have to pay a utilization fee.

For example, a lender may charge you a utilization fee if you withdraw a large amount of money on a revolving line of credit. This utilization fee allows your lender to receive the capital they need to continue operating and lend to others.

Let’s say you go to the bank and take out a line of credit for $50,000. In your loan terms, you notice that a utilization fee will be triggered if you access 50% or more of the funds accessible to you. One day, you withdraw $27,000 to put toward a kitchen remodel. This is more than 50% of the line of credit, so it triggers the utilization fee. If you withdrew $24,000 instead, you wouldn’t have to pay the utilization fee since that amount is below 50%.

Check the terms of your loan or line of credit to understand if and when a utilization fee may apply.

If you have a guaranteed loan, you may also have to pay a utilization fee. This fee may be charged on the outstanding principal of the loan. You’ll likely have to pay it twice a year (bi- or semi-annual payments).

A guaranteed loan is one that is backed by a third party to help strengthen the borrower’s ability to repay the loan and/or support the financial institution’s lending capabilities. For example, the Development Credit Authority (DCA) and the U.S. International Development Finance Corporation (DFC) both offer loan guarantees to help finance development projects in emerging markets and they both charge a utilization fee.

How a Utilization Fee Works

Not all lenders charge utilization fees. Those who do, however, will outline the details in the loan terms. The lender and loan or line of credit type will determine how much the utilization fee will be and when you may have to pay it. You may pay the fee on an annual or semi-annual basis, and it will be based on the percentage of the line of credit you withdraw or the outstanding loan principal balance.

A utilization fee could also be a fee charged when you use a service or facility, such as an airport. It may be a flat rate or it could be based on how often you use it.

Utilization Fee vs. Credit Utilization Ratio

While the terms “utilization fee” and “credit utilization ratio” sound similar, they have different meanings. A utilization fee is an actual fee you may pay on a line of credit or loan. A credit utilization ratio is the amount of credit you use compared to your total available credit.

Here’s how the credit utilization ratio works. First, add up how much total credit you have available to you. For example, if you have three credit cards, each with a $5,000 credit limit, your total available credit would equal $15,000. Next, calculate how much credit you’re currently using. If you have $1,000 on one credit card, $500 on the second card, and $100 on the third, that’s a total of $1,600. Now divide that credit usage by your total credit limit. In this example, the credit utilization ratio would be about 10.7% ($1,600 / $15,000).

Your credit utilization ratio plays a key role in your credit score and indicates how good you are with your finances, so it’s a good idea to keep an eye on yours. Most financial experts recommend a credit utilization ratio of no more than 30%, and below 10% may be even better.

Do You Need To Pay a Utilization Fee?

If you have a revolving line of credit or a loan and the terms include a utilization fee, you’ll be required to pay it if it’s triggered or when it’s due. If you do not trigger the fee, you may not need to pay it. If you keep your usage low, you may be able to avoid this fee.

If you can’t avoid the fee, discuss the best way to pay it with your lender. Remember, not paying a fee or managing your debt well could show up on your credit report and impact your score.

Key Takeaways

  • A utilization fee is a periodic fee you may have to pay on a line of credit or term loan.
  • If there’s a utilization fee, it will be included in the loan or credit terms, along with any other fees you may need to pay.
  • Lenders may charge a utilization fee if and when you access a large amount of your line of credit or loan.
  • Utilization fees may also apply to loans that are guaranteed by a third party.
  • A utilization fee and a credit utilization ratio are two different things. The latter is how much credit you’re currently using divided by the total amount of credit available to you.