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Learn how to manage your credit utilisation ratio to improve your credit score and secure better loan terms.
Your credit utilisation ratio has a significant impact on your credit score. Whether applying for a home loan, personal loan, or credit card, this ratio affects both your approval chances and the terms offered. In India, managing credit utilisation effectively can improve your credit score and unlock better financial opportunities.
The credit utilisation ratio is the percentage of your available credit that you're currently using. It’s a simple but powerful metric that reflects your credit management habits and plays a significant role in determining your credit score.
You can determine your credit utilisation ratio by dividing your outstanding balance by your total credit limit and multiplying the result by 100 to express it as a percentage.
Example:
Let’s say you have a credit card with a limit of ₹1,00,000, and your current outstanding balance is ₹30,000. Your credit utilisation ratio would be:
Credit Utilisation Ratio = (Outstanding Balance / Credit Limit) x 100
= (₹30,000 / ₹1,00,000) x 100
= 30%
In this example, your credit utilisation ratio is 30%. This means you're using 30% of your available credit.
In India, it is advised to keep your credit utilisation ratio under 30%. For example, with a ₹1,00,000 credit limit, try to maintain an outstanding balance below ₹30,000. A ratio under 30% is viewed as a sign of responsible credit management and good financial habits.
However, the lower your credit utilisation ratio, the better it is for your credit score. While 30% is widely accepted as a healthy threshold, keeping your credit utilisation ratio below 20% or even 10% can further boost your credit score. This shows lenders that you’re not over-relying on credit, which can signal financial stability and responsible borrowing.
Maintaining a lower credit utilisation ratio not only strengthens your credit profile but also increases your chances of receiving better interest rates and loan terms when applying for credit in India.
Here is how your credit utilisation ratio significantly influences the outcome of your credit score:
When your credit utilisation ratio is high, it suggests to lenders that you may be overextending yourself financially. This increases the perceived risk, which can lead to a lower credit score and make it more difficult to qualify for loans at favourable interest rates.
Maintaining a low credit utilisation ratio shows lenders that you’re not relying too heavily on credit. This portrays you as a responsible borrower, which can help you secure credit with better terms and lower interest rates.
A well-managed credit utilisation ratio is vital for your credit score, as it can either improve your chances of credit approval or raise concerns with lenders depending on how you manage your available credit.
Here are the key factors that can affect your credit utilisation ratio and credit score:
Higher credit limits reduce your credit utilisation ratio, even if your spending habits stay the same.
Carrying high outstanding balances increases your credit utilisation ratio, negatively impacting your credit score.
Having multiple credit cards increases your total available credit, helping to lower your credit utilisation ratio.
Opening new credit cards raises your credit limit, which can lower your credit utilisation ratio, provided you don’t increase spending.
Late payments can raise your balance, increasing your credit utilisation ratio and hurting your credit score.
Using credit frequently while keeping balances low can demonstrate responsible credit management, positively impacting your credit score.
Premium credit cards with higher limits can help reduce your credit utilisation ratio compared to standard cards with lower limits.
Revolving credit, like credit cards, affects your credit utilisation ratio, while non-revolving credit does not, but still impacts your credit score in other ways.
Here are some practical tips to help you manage your credit utilisation ratio and maintain a healthy credit score:
Regularly pay off your credit card, preferably before the billing cycle closes, to maintain a low credit utilisation ratio and prevent high outstanding balances.
Request a credit limit increase if you have a good credit history, as this can lower your credit utilisation ratio without changing your spending habits.
Distribute your spending across multiple credit cards to keep the credit utilisation ratio low on each one and avoid maxing out any card.
Avoid using more than 30% of your available credit on any card to maintain a low credit utilisation ratio and protect your credit score.
Limit your credit card use to essential purchases to avoid accumulating unnecessary debt and keep your credit utilisation ratio under control.
Set reminders for your credit card payment due dates to ensure timely payments and avoid late fees or interest charges that increase your credit utilisation ratio.
Make multiple payments throughout the month to keep your credit utilisation ratio low, especially if you use your cards frequently.
Regularly check your credit card statements or use apps that alert you when you’re nearing your credit limit, preventing unnecessary increases in your credit utilisation ratio.
Consider transferring balances from high-interest cards to those with higher limits to lower your credit utilisation ratio and reduce debt more efficiently.
Pay off high-interest credit card debt more aggressively to reduce balances quickly and improve your credit utilisation ratio, boosting your credit score.
Managing your credit utilisation ratio is key to maintaining a strong credit score. Keeping your credit utilisation low demonstrates financial responsibility, improving your chances of securing better loan terms and interest rates. By paying off balances regularly, requesting credit limit increases, and spreading spending across multiple cards, you can effectively lower your credit utilisation ratio and boost your credit health.
Your credit utilisation ratio accounts for around 30% of your credit score. A higher ratio suggests over-reliance on credit, lowering your score, while a lower ratio shows responsible credit management, boosting your score and improving your chances of better loan terms.
To improve your credit utilisation ratio, pay off credit card balances regularly, request credit limit increases, and spread expenses across multiple cards. These actions help lower your ratio, demonstrating responsible credit usage, which can enhance your credit score.
The ideal credit utilisation ratio is under 30%, meaning you should use less than 30% of your total available credit. Maintaining a ratio below this threshold demonstrates financial responsibility, helping improve your credit score and increasing your chances of loan approvals.
The credit utilisation ratio is a key factor in determining your credit score. Lenders view a lower ratio as a sign of responsible credit usage, while a higher ratio may indicate financial stress, increasing the perceived risk and lowering your chances of securing credit.
While a low credit utilisation ratio is beneficial, having it too low, especially zero, can suggest to lenders that you're not using credit enough to build a positive history. This can negatively affect your credit score, as regular usage is a sign of financial activity.
Zero credit utilisation can hurt your credit score because it may signal to lenders that you're not actively managing your credit. While a low ratio is ideal, using a small amount of credit regularly and paying it off can strengthen your score.
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