Credit has become an essential tool for managing expenses and achieving financial goals. Credit cards offer the flexibility to make necessary purchases and pay for them later. However, responsible repayment is essential to maintaining financial health. Many borrowers opt to pay only the minimum due, which can lead to higher debt and impact their credit score. This article explores the concept of the credit utilisation ratio and its impact on your CIBIL score, helping you make informed financial decisions.
What is a Credit Utilisation Ratio?
Your credit utilisation ratio is the percentage of your available credit that you have used. Depending on the scoring model, this ratio can contribute to 20% to 30% of your overall credit score.
If you have a credit card but do not use it, your credit utilisation ratio remains at zero. However, as soon as you start making purchases, your ratio adjusts accordingly. To maintain a healthy credit score, it is important to keep your credit utilisation low—ideally below 30% of your total credit limit.
An occasional increase in your credit utilisation would not harm your CIBIL score, but if you consistently exhaust your credit cards or keep a high utilisation ratio, your score is likely to drop. Managing your credit usage wisely can help you maintain a strong financial profile and improve your borrowing potential.
How to Calculate Credit Utilisation Ratio?
It is quite easy to calculate your credit utilisation ratio. Simply divide the balance available on your credit card by the total limit on your credit card and you will have your credit utilisation ratio.
Therefore, credit utilisation ratio = (Total outstanding on all credit cards/ Total credit limit) x 100
Let us understand this with an example. If you have two credit cards with a total limit of Rs.1 Lakh with an outstanding balance of Rs.20,000 on one card and Rs.30,000 on another card.
This way, your credit utilisation ratio is calculated as:
The total outstanding balances on both the cards: Rs.20,000 + Rs.30,000 = Rs.50,000
The total credit limit = Rs.1 Lakh
The credit utilisation ratio on your card is: (50,000/1,00,000) x 100 = 50%
This means your credit utilisation ratio is 50%.
What is a Good Credit Utilisation Ratio?
A good credit utilisation ratio is typically 30% or lower of your total available credit. This means you should aim to use no more than 30% of your credit card limit at any given time. Lenders consider this an ideal ratio as it indicates responsible credit management.
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.
Simple Tips to Help You Improve Your Credit Utilisation Ratio
Clear Credit Card Bills on Time
To maintain a healthy credit utilisation ratio, it is essential to clear your credit card bills on time. Credit cards offer the convenience of purchasing now and paying later, but responsible usage is key. Regardless of how often you use your credit card, timely repayment is important. Always aim to pay the full outstanding balance rather than just the minimum due, and avoid maxing out your credit limit. By using your credit card wisely and making timely payments, you can keep your credit utilisation in check and maintain a strong credit score.
Request Your Lender to Increase the Credit Limit on Your Credit Card
If you have a strong repayment history, you may request an increase in your credit limit. A higher credit limit can help lower your credit utilisation ratio, positively impacting your CIBIL score. However, it is essential to approach this wisely - only request a credit limit increase if you can manage it responsibly.
Consider Using Different Cards for Differet Purposes
Yet another way you can increase your credit utilisation ratio is by using different credit cards for different transactions. This will help you maintain a low credit utilisation ratio on all your credit cards.
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
FAQS
The ideal credit utilisation ratio should be below 30% of your total available credit.
You can lower your credit utilisation ratio by:
● Paying off credit card bills on time and in full.
● Requesting a credit limit increase from your lender.
● Using multiple credit cards for different purchases to distribute spending.
Yes, a credit utilisation ratio above 70% can negatively impact your CIBIL score.
Yes, maintaining a low credit utilisation ratio demonstrates good credit behaviour and improves your creditworthiness.
DISCLAIMER:
While care is taken to update the information, products, and services included in or available on our website and related platforms/websites, there may be inadvertent errors or delays in updating the information. The material contained in this website and on associated web pages, is for reference and general information purposes, and the details mentioned in the respective product/service document shall prevail in case of any inconsistency. Users should seek professional advice before acting on the basis of the information contained herein. Please take an informed decision with respect to any product or service after going through the relevant product/service document and applicable terms and conditions. Neither Bajaj Housing Finance Limited nor any of its agents/associates/affiliates shall be liable for any act or omission of the Users relying on the information contained on this website and on associated web pages. In case any inconsistencies are observed, please click on contact information.
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