Credit Utilisation Ratio: All You Need to Know

Credit cards have become an integral part of our daily life be it grocery shopping, electronics, gadgets or miscellaneous payments. Credit cards have taken all over making our lives easier. In order to maximise the use of credit cards without landing in a debt, it is important to understand the credit utilization ratio. In this blog we will discuss the credit utilization ratio in detail.

What is Credit Utilisation Ratio

Credit cards come with a credit limit which can be used for spending. Credit utilization ratio is the percentage of credit that you use from the available credit limit. Credit utilisation ratio indicates the pattern of credit usage.

Low credit utilization ratio positively impacts credit score whereas higher utilisation impacts negatively. This ratio is calculated by dividing outstanding balance by credit limit.  For example, if you have a credit limit of 2,00,000 and have a balance of 60,000 then your credit utilisation ratio is 30%.

How Does Credit Utilisation Ratio Work?

Credit utilization ratio is considered by different credit rating agencies in order to calculate credit score. Lenders use this ratio to understand how you manage debt. If credit utilization is low it indicates lenders that you rely less on credit and can manage debt easily resulting in securing a higher credit score. A higher credit score will lead to securing more credit like loans, credit cards, etc.  A higher credit utilization ratio signals that you rely heavily on credit and are bad in managing finances. This leads to a lower credit score resulting in difficulty in securing credit. 

How to lower your Credit Card Utilisation Ratio?

Now you know that obtaining a lower credit utilisation ratio is important for a good credit score. Let’s have a look at how to maintain a lower credit utilisation ratio- 

Limit Credit card Spending

The first important thing for lowering credit utilisation ratio is limiting the credit card spending. If you use a credit card for every small transaction it will lead to an increase in the utilization ratio. Instead of using one credit card use a  mix of credit cards, debit cards and cash. This will minimize your spending from one credit card leading to a lower credit utilization ratio. 

Make timely payments

Credit cards outstanding balance needs to be cleared on time as it directly impacts utilization ratio. Make sure you make full payment of credit card outstanding balance. Repaying the full credit card outstanding payment or a substantial amount will bring the credit utilization ratio low. If you cannot the full amount then make sure you keep the outstanding balance as low as possible i.e. below 30%. 

Request a credit limit increase

If you can’t minimize your spending and lower your credit usage then you can ask for an increase in credit limit from your bank. An increased credit limit will increase the amount of available credit limit thus reducing utilization ratio. Make sure increasing the credit limit doesn't increase your credit usage because then it will again increase the usage ratio. 

Monitor your expenses

Lowering credit utilization ratio requires regular monitoring on credit card activities and balances. If you have multiple credit cards then it is important to keep track of your spendings in order to avoid going over credit limit and maintaining a lower usage ratio. 

Consider new credit accounts

You can consider applying for a new credit card in order to increase the total credit limit. Applying for a credit card might have a short negative impact on credit score. Multiple credit cards might need discipline in order to avoid debt.

Avoid using multiple credit cards: 

Lower credit utilization ratio can be achieved by just keeping some of your credit cards at zero outstanding balance. Not using some credit cards will increase your total credit limit and reduce usage ratio. This is only possible if you don’t overspend on the other cards. 

How Does Credit Utilisation Affect Credit Score?

Lower credit utilization ratio leads to positive credit score and financial health. Credit cards tends to be tempting for spending more than debit cards or cash. This excessive spending not only leads to unnecessary debt but also impacts negatively on credit score. 

Credit utilization ratio indicates potential lenders that how you manage your credit. A lower credit usage ratio indicates you don’t rely on credit and manage credit responsibly resulting in higher credit score. Whereas a higher ratio indicates that you heavily rely on credit and can be financially riskier leading to lower credit score.

Maintaining a lower credit utilization ratio around 30-40% might have a positive impact on credit score. A higher ratio of negativity impacts your credit score which might make getting loans or credit cards difficult. 

Conclusion

Understanding and managing your credit card utilization percentage is critical to maintaining a strong credit score and financial stability.  You may use your credit cards wisely by restricting your spending, making timely payments, and keeping track of your credit limitations.  Always be cautious of your credit behavior and prioritize prudent usage to protect your financial future.