What Is the Credit Utilisation Ratio and Why Does It Matter?

The Credit Utilisation Ratio (CUR) is one of the most crucial but often neglected considerations that affect your credit score. While some borrowers are more concerned about timely payment of EMI and credit card payments, it is just as critical to ensure that your credit utilisation ratio is optimal for creating an ideal credit profile.

An increased credit utilisation ratio may suggest an excessive reliance on credit, while a low credit utilisation ratio means that you manage your finances wisely. Knowledge of what is credit utilisation ratio and its impact on your credit score can be beneficial in improving your finances and getting loan approvals.

Want to improve your borrowing profile? Learning how to lower credit utilisation ratio can help you manage credit card balances more effectively and support a healthier CIBIL score.

What Is Credit Utilisation Ratio?

The Credit Utilisation Ratio is the percentage of your available credit that you are currently using. It reflects how much of your total credit limit has been utilised at any given time.

The formula for calculating the Credit Utilisation Ratio is:

Credit Utilisation Ratio = (Outstanding Credit Balance ÷ Total Credit Limit) × 100

For example:

Suppose your credit card has a total credit limit of ₹1,00,000, and your outstanding balance is ₹20,000.

Your Credit Utilisation Ratio would be:

(₹20,000 ÷ ₹1,00,000) × 100 = 20%

In this case, you are using only 20% of your available credit, which is generally considered healthy.

Why Is Credit Utilisation Ratio Important?

Credit Utilisation Ratio is a tool used by creditors to determine the responsibility with which one uses the available credit.

A low Credit Utilisation Ratio means:

• One is not too reliant on borrowed funds.

• One has a responsible use of credit.

• One does not have a tendency to default on loan payments in the future.

However, a continuously high credit utilisation ratio could mean that you are facing financial troubles and will make you a poor creditworthy person.

How Does Credit Utilisation Ratio Affect Your Credit Score?

Credit Utilisation Ratio is one of the main factors affecting your credit score.

While payment history continues to be one of the most important factors, lenders consider how much of your credit limit you normally utilise.

Having a good Credit Utilisation Ratio will:

• Enhance your credit standing.

• Boost your odds of getting loans approved.

• Show good credit behaviour.

• Help sustain a high credit score.

On the contrary, utilising most of your available credit limit every month will adversely affect your credit score despite having regular repayments.

How to Maintain a Healthy Credit Utilisation Ratio

Having a low credit utilisation rate does not always require you to use your credit cards sparingly. It requires the efficient management of your credit cards. Some effective ways are given below.

1. Keep Your Credit Utilisation Rate Under 30%

Make sure that you do not go above 30% of the credit limit of your cards.

2. Clear Credit Card Debts Timely

This will decrease the outstanding balance and thus keep the ratio down.

3. Do Not Use Your Whole Credit Limit Regularly

Frequent usage of the whole credit limit on your credit card may have an adverse effect on your credit history regardless of the fact that you pay back your debts.

4. Share Expenditure Among Different Credit Cards

If you have multiple credit cards, you can share the expenditure among those to keep the utilisation rate low for all the cards.

5. Get a Higher Credit Limit Where Possible

Getting a higher credit limit will lower your ratio, assuming the fact that your expenditures stay the same.

If high credit utilisation has already affected your credit profile, a CIBIL consultant can help you understand your report, while legitimate CIBIL repair services may be relevant when inaccurate information needs correction.

Why Monitoring Your Credit Utilisation Matters

Your Credit Utilization Rate varies every month based on how you spend and repay.

Checking your credit report every now and then will enable you to:

• Keep track of your utilisation rate.

• Determine if you have excessively used your credit.

• Check if there is an improvement or deterioration in your credit score.

• Detect errors in reporting.

• Maintain a good credit profile.

Final Thoughts

Primescore has accessed and came to a conclusion that the Credit Utilization Ratio is an effective measure of your financial responsibility. Our team has determined that although it is important to pay your EMIs on time, having your credit utilization ratio at less than 30% will show that you are a responsible borrower and improve your credit score greatly.

Understanding the Credit Utilization Ratio and making good use of your available credit can help you enhance your credit worthiness.

Keep your credit profile healthier with regular monitoring, and consider a trusted CIBIL correction agency if you discover inaccurate credit-report information affecting your financial profile.

FAQs

Credit Utilisation Ratio - What is it?

Credit Utilisation Ratio refers to the proportion of credit balance used out of the total available credit limit. This ratio is computed as follows: the credit balance outstanding is divided by the total credit limit and multiplied by 100.

What should be my ideal Credit Utilisation Ratio?

According to most financial advisors, the ideal Credit Utilisation Ratio is under 30%, which will help in having a good credit score.

Does my Credit Utilisation Ratio affect my credit score?

Certainly, a high Credit Utilisation Ratio could bring down your credit score as it shows that there is more reliance on borrowed funds.

Can my payment of a credit card bill decrease my Credit Utilisation Ratio?

Yes, paying your credit card bills will decrease your credit utilisation ratio.