A Simple Guide to Your Credit Utilization Ratio

1. A low credit utilization ratio (ideally below 30%) signals to lenders that you manage your finances responsibly without depending too heavily on credit. This makes you a low-risk borrower, improving your chances of getting approved for loans and better interest rates.
2. A high credit utilization ratio suggests that you may be over-extended and struggling with your finances. Lenders see this as a sign of risk, which can lead to a lower credit score and make it harder to get new credit in the future.

How to Calculate Credit Utilization Ratio?

Credit utilisation ratio = (Total outstanding on all credit cards / Total credit limit) X 100

For instance, you have two credit cards, having a total limit of Rs.1 lakh, and an outstanding balance of Rs.50,000 on one card and Rs.0 on another card. Then your credit utilisation ratio is calculated by dividing the total outstanding on both the cards (Rs.50,000 + Rs.0) with the total credit limit on the cards (Rs.1 lakh). Credit utilisation ratio on your card thus becomes (1,00,000 ÷ 50,000) × 100 = 50%. Your credit utilisation ratio is 50%, which means you're using half of the total credit available for you. Credit utilisation ratio can also be calculated for each of your credit cards and is called per-card ratio.

What is a Good Credit Utilization Rate?

Different credit agencies may have a different cut-off to determine the ideal credit utilisation ratio. However, it is usually recommended to have a total credit utilisation ratio below or equal to 30%.

For instance, if your total credit limit on all your credit cards is Rs.1 lakh, your total outstanding on all the credit cards at any point of time should not exceed Rs.30,000.

Ideal Credit Utilisation Ratio - Below 30% of the total credit limit

How Does Credit Utilization Work?

Credit utilisation ratio is typically considered by the credit rating agencies like CIBIL and Experian to calculate the credit score.

The ratio can impact up to 30% of your credit score making it one among the most influential factors.

A low credit utilisation ratio indicates you're depending less on credit. This makes credit agencies believe that you're good at managing your credit and are spending within the limit. This, in turn, helps you secure a high credit score.

High credit score further enables you to secure other credit lines such as auto loans, home loans, personal loans, etc., much easier.

On the flip side, a high utilisation ratio could send a message to the potential creditor that you're struggling to manage your finances. This would lead to less or no eligibility for a loan.

5 Ways to Improve Your Credit Utilization Ratio

Improving your ratio involves two main goals: decreasing your debt and increasing your available credit. Here are five effective strategies.

1. Pay Your Bill in Full Every Month

The most powerful habit. By paying your entire balance before the due date, you prevent interest charges and reset your utilization for the next cycle. Even making payments larger than the minimum can significantly help.

2. Keep Spending Below the 30% Mark

Aim to keep your total outstanding balance below 30% of your total credit limit. If your limit is ₹1,00,000, try not to owe more than ₹30,000 at any point. This shows lenders you aren't reliant on credit.

3. Request a Credit Limit Increase

After 6-12 months of responsible use, ask your card issuer for a higher credit limit. A higher limit instantly lowers your CUR for the same amount of spending. This boosts your credit score and purchasing power without you spending a rupee more.

4. Keep Old Credit Cards Open

An unused credit card with a zero balance is not a wasted card. It contributes to your total available credit, which helps keep your utilization ratio low. Avoid closing old accounts, as this can shrink your credit line and hurt your score.

5. Be Strategic with New Credit Applications

While a new card adds to your total credit limit, each application triggers a "hard inquiry" that can temporarily dip your credit score. Only apply for new cards when you have a clear need for them.

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