Credit Utilisation Ratio: How It Works

How you use your available credit can influence your overall credit profile. Even when repayments are made on time, using a large portion of the credit available to you may affect how your credit behaviour is assessed. 

This is where the credit utilisation ratio becomes relevant. Knowing how it works can help you understand your credit usage better and make more informed financial decisions. Read further to know how the ratio is calculated, what may be considered a healthy range, and the ways in which you can manage it. 

What is Credit Utilisation Ratio?

The credit utilisation ratio indicates how much of your available revolving credit you are using at a given time. It is most commonly associated with credit cards and is expressed as a percentage. For example, if your total credit card limit is Rs.1 Lakh and your outstanding balance is Rs.30,000, your credit utilisation ratio is 30%. 

Credit bureaus may consider this ratio while assessing your credit profile. Regularly using a high proportion of your available credit can indicate greater dependence on credit, whereas maintaining a lower ratio may support a healthier credit profile. 

How to Calculate Credit Utilisation Ratio?

You can calculate your credit utilisation ratio by comparing the amount of credit you are currently using with your total available credit limit. 

Credit Utilisation Ratio = (Total Credit Used / Total Credit Limit) × 100 

For example, if your total credit limit across credit cards is Rs.2 Lakh and the outstanding amount is Rs.50,000, your credit utilisation ratio would be: 

(Rs.50,000 / Rs.2,00,000) × 100 = 25% 

If you have more than one credit card, you can add the outstanding balances and credit limits across all cards to calculate your overall credit utilisation ratio. 

Key Factors that Shape Your Credit Utilisation Ratio

Your credit utilisation ratio reflects how much of your available credit you are currently using, and it plays a major role in determining your credit score. It is calculated by dividing the total outstanding balances on your credit cards by the total credit limits, expressed as a percentage. Lenders often prefer to see this ratio below 30%, as consistently high utilisation can negatively impact your score.  
Several factors influence this ratio: your spending habits, the size of your credit limit, how often you clear outstanding balances, and whether you keep unused credit cards open. To maintain a healthy ratio, you can lower spending, request a credit limit increase, track expenses across multiple cards, pay off balances promptly, and avoid closing old cards unnecessarily. Keeping utilisation under control demonstrates responsible credit behaviour and helps improve access to future loans. 

What is a Good Credit Utilisation Ratio? 

A credit utilisation ratio of 30% or lower is generally considered a healthy range. A lower ratio generally indicates that you are using a smaller portion of the credit available to you, which can have a positive influence on your overall credit profile. 

How Credit Utilisation Impact Borrowers?

Your credit utilisation ratio plays a key role in determining your creditworthiness. It reflects how much of your available credit is being used and impacts your CIBIL score directly. Lenders assess this ratio to gauge your financial management before approving a loan. 

How Does Credit Utilisation Affect Your Credit Score?

Credit utilisation is one of the most important factors in your credit score. It represents the percentage of your available revolving credit that you are currently using. A high utilisation ratio suggests you may be relying too heavily on credit, which can lower your score. Conversely, keeping your utilisation low shows responsible credit management and helps improve your score.  

How to Lower Your Credit Utilisation Ratio?

To reduce your credit utilisation ratio: 

• Pay outstanding balances regularly and on time. 
• Avoid closing old credit cards, as this reduces your total available credit. 
• Aim to keep overall utilisation below 30%. 

Common Credit Utilisation Mistakes to Avoid

To keep your credit utilisation low, avoid the following mistakes: 

• Do not max out a single credit card while keeping other cards unused, as it can hurt your credit profile. Credit bureaus evaluate utilisation per card, not just overall, so high usage on one card can raise concerns.  
• Don’t assume that paying the bill before the due date keeps utilisation low is a common misunderstanding. What gets reported is usually the balance on the statement date, not the payment date. 
• Closing old credit cards without careful thought can reduce your total available credit. This increases your utilisation ratio instantly, even if your spending remains unchanged. 

How to Improve Your Credit Utilisation Ratio 

A lower credit utilisation ratio can support a healthier credit profile. Here are a few ways to manage it effectively. 

Pay Your Credit Card Bills on Time 

Paying your credit card bills on time helps you manage outstanding balances and maintain a disciplined repayment history. Where feasible, consider paying the full amount due rather than only the minimum amount. Keeping balances within a reasonable portion of your available credit can also help maintain a lower utilisation ratio. 

Consider Requesting a Higher Credit Limit 

If you have a consistent repayment history, you may be eligible to request a higher credit limit from your card issuer. If your spending remains unchanged, a higher limit can reduce your credit utilisation ratio. 

For example, if your outstanding balance is Rs.30,000 on a Rs.1 Lakh limit, your utilisation ratio is 30%. If the limit increases to Rs.1.5 Lakh while the balance remains the same, the ratio reduces to 20%. 

Manage Utilisation Across Multiple Cards 

If you use more than one credit card, keep track of the balance and available limit on each card. Avoid using a large portion of the limit on any one card, as both individual card utilisation and overall credit usage may be considered when assessing your credit profile. 

Also Read: Ways to Improve Your Credit Score with a Credit Card

Final Words

If you are planning to apply for a loan—whether secured or unsecured—your eligibility will largely depend on your CIBIL score. Most lenders require a minimum score of 750 for loan approval. Your CIBIL score is influenced by several factors, including your credit history, credit utilisation ratio, and new credit enquiries. By keeping your utilisation low and making timely repayments, you can improve your credit profile and increase your chances of securing a loan.

Also Read: Tips to Maintain Your Business CIBIL Score Above 700