What is Credit Utilisation Ratio

In India, the credit utilisation ratio plays a pivotal role in shaping your credit profile. It reflects the proportion of your available credit in use and serves as a key indicator of your financial discipline. Lenders and credit bureaus like CIBIL closely monitor this metric to gauge your creditworthiness. Maintaining an optimal credit utilisation ratio boosts your credit score. It also enhances your chances of securing loans and credit cards on favourable terms.

Understanding how to calculate the credit utilisation ratio is key to maintaining good credit health. This ratio represents the percentage of your available credit that you are currently using. Here's how you can calculate it:

1. Identify Your Total Credit Limit

Add up the credit limits on all your active credit accounts, including credit cards and other revolving credit facilities. For example, if you have two credit cards with limits of ₹1,00,000 and ₹50,000, your total credit limit is ₹1,50,000.

2. Determine Your Total Outstanding Balance

Next, calculate the total balance you currently owe across all these accounts. If your first card has a balance of ₹30,000 and the second ₹10,000, your total outstanding balance is ₹40,000.

3. Apply the Formula

Use the following formula to calculate your credit utilisation ratio:

• Credit Utilisation Ratio = (Total Credit Limit / Total Outstanding Balance) x 100

     = (40,000 / 1,50,000) x 100 = 26.67%

 

This means you’re utilising 26.67% of your available credit, which is considered a healthy level.

A good credit utilisation ratio reflects responsible credit use without over-reliance on borrowed funds. Keeping your utilisation low signals financial discipline, which positively influences your CIBIL score. Lenders view low credit utilisation ratios impact on credit score as a sign that you manage credit responsibly and are less likely to default.

 

While there is no universally fixed percentage, maintaining a low ratio ensures your credit profile remains strong. Ultimately, a healthy credit utilisation rate improves your chances of securing loans and credit cards with favourable terms.

Credit utilisation ratio refers to the percentage of your available credit currently in use. It plays a significant role in determining your creditworthiness and impacts your credit score. Here’s how it works:

Calculation and Monitoring

The credit utilisation ratio meaning becomes clear with its monthly calculation. Lenders track your financial habits by dividing your outstanding credit by your total credit limit. For example, if your credit limit is ₹1,00,000 and your balance is ₹25,000, your utilisation ratio is 25%.

Impact on Credit Score

In India, the credit utilisation ratios impact on credit score is significant which is evaluated by credit bureaus like CIBIL. A lower utilisation ratio generally leads to a higher credit score. It shows that you use credit wisely and don’t rely heavily on borrowed funds.

Lender’s Perspective

Lenders assess your credit utilisation to determine your financial stability. A high utilisation ratio suggests over-dependence on credit, increasing the risk of default. Conversely, a low ratio signals prudent credit management. This improves your chances of loan approvals and better terms.

Dynamic Nature

Your credit utilisation ratio changes based on your spending and repayment habits. Even if you pay off your balance in full each month, high usage before the statement date can be an issue. It may temporarily increase your utilisation ratio and impact your credit score.

 

By understanding how credit utilisation works, you can take proactive steps to manage it effectively, ensuring a healthy financial profile.

A high credit utilisation ratio can harm your credit score and deter lenders from offering credit. Thankfully, there are practical methods to reduce this ratio and enhance your financial standing. If your utilisation is on the higher side, try these strategies to bring it down:

Pay Off Balances Quickly

Clearing your credit card balances promptly is one of the most effective ways to reduce your credit utilisation ratio. Even if you can’t pay the full balance, prioritise paying down as much as possible, especially on cards with high utilisation. Timely payments also help you avoid late fees and interest, which can worsen your financial burden.

Increase Your Credit Limit

Requesting a higher credit limit from your bank is another strategy to lower your credit utilisation ratio. A higher limit increases your overall available credit, reducing the percentage of credit used. Use this option wisely; higher limits should improve utilisation, not lead to overspending.

Use Multiple Credit Cards Wisely

Distributing your expenses across multiple credit cards keeps the utilisation ratio low on each. If one card nears its limit, shifting some spending to another card can balance your overall utilisation. Be sure to manage payments across all accounts to avoid late fees or penalties.

Make Multiple Payments in a Month

Making multiple payments throughout the billing cycle can significantly reduce your reported credit utilisation. Even if you frequently use your card, paying down the balance before the statement date ensures that only a low utilisation is reported to credit bureaus, which positively impacts your credit score.

Set Alerts and Monitor Spending

Set up payment reminders or alerts for your credit cards to ensure timely repayments. Monitoring your expenses regularly helps you stay within manageable limits, preventing high utilisation. Some credit card apps also allow you to track your utilisation rate in real-time, giving you better control over your credit health.

Avoid Closing Old Credit Accounts

Keeping older credit cards open, even if unused, helps maintain a higher overall credit limit. This reduces your utilisation ratio, as long as you keep balances low. Closing old accounts reduces your available credit, which can inadvertently increase your utilisation rate, negatively affecting your credit score.

Balancing your credit limit and spending is crucial for maintaining a healthy credit utilisation ratio. While increasing your credit limit can lower your utilisation ratio, it also poses the risk of overspending. On the other hand, a low credit limit can lead to a high utilisation ratio, even with moderate spending.

 

The key to managing this conundrum lies in disciplined spending and timely payments. Regular credit report reviews help track your credit utilisation ratios impact on credit score and catch errors.

 

To effectively balance your credit limit and spending, focus on these strategies:

• Avoid overspending by resisting the temptation to max out your credit, even if your limit increases

• Regularly pay off balances to keep your utilisation ratio low

• Regular reviews help you track your credit utilisation and catch any errors that may affect your score

 

By striking the right balance between credit limits and spending, you can optimise your credit utilisation ratio while maintaining financial stability