Why is the credit utilization ratio relevant to your credit score?

Several factors collectively constitute responsible use of credit cards. Among these, the credit utilization ratio (CUR) is one of the most important. This is the percentage of revolving credit you’ve used of your total credit limit and directly affects your credit score.

For example, if you have a credit limit of Rs 5 lakh on your credit card, of which you spend Rs 50,000, your CUR would be 10%, i.e. Rs 50,000/Rs 5 lakh. A low CUR of up to 30% indicates good credit management and can improve your credit score. But, a consistently high CUR indicates overspending, which impacts your credit score.

How is the CUR calculated?

When it comes to CUR, a higher credit limit can help reduce your utilization rate. For example, you have three credit cards, each with a credit limit of Rs 1 lakh, giving you a total limit of Rs 3 lakh. If you spend Rs 30,000 using one of these cards, your CUR is 10%, i.e. the credit used (Rs 30,000) divided by the total credit available (Rs 3 lakh). If you close any of the three credit cards, your limit will increase from Rs 3 lakh to Rs 2 lakh. Now, if you spend Rs 30,000 using one of the two remaining credit cards, your CUR will be 15%, or Rs 30,000/Rs 2 lakh.

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How does CUR impact your credit score?

Your credit utilization ratio has a direct impact on your credit score. A CUR of up to 30% is ideal and indicates sound credit management. On the other hand, regularly having a CUR above 30% can be a red flag for lenders who associate it with financial indiscipline and possible future default. However, sporadic instances of a high CUR are unlikely to impact your credit score only if you make timely bill payments in subsequent billing cycles, allowing your credit score to improve. get well.

How to keep your CUR low?

There are several ways to control your CUR. Improve your credit limit to maintain a low CUR. Your credit card issuer may offer you a higher limit if you’ve consistently made timely bill payments or reported an increase in your income.

Having multiple credit cards is another way to increase your limit and keep your CUR low. However, be sure to follow the due dates of all cards to avoid payment defaults. If you go over the CUR by 30% during a billing cycle, don’t wait until the due date to pay the bill, but make small payments to bring the CUR down. Consider taking out a short-term loan for high-value purchases instead of charging them to your credit card to reduce stress on your credit utilization rate.

(The author is CEO, Bankbazaar.com)