Credit Utilization Ratio: How it Works & How to Improve It

27 JANUARY, 2022

Credit cards are a source of instant money without any hassle of approval or processing. The growing number of credit card users in India speak volume about the popularity of this magic card. Not only has it opened the avenues for instant financing needs of the borrowers but have also expanded their buying capabilities.

However, to utilise a credit card to its optimal limit without landing in a pile of debt or other issues is a smart move. To ace that move effectively, you need to understand all its nitty-gritty which includes credit utilisation ratio as one of the most important factors. Credit utilisation ratio stands for the ratio of credit amount utilised viz-a-viz credit available to you.

When you compare credit cards in India before you decide to apply for the best one for yourself, it also gets important that you thoroughly understand the credit limit available on your credit card. Every credit card limit is based on the borrower’s income and credit score. However, it doesn’t sound sensible to exhaust the entire available credit limit. This is where the credit utilization ratio steps in.

The credit utilization ratio stands for your available credit limit upon your monthly utilisation of a credit card. It is important to keep this limit under 30% as constantly using your credit card to its optimal capacity shows that you don’t have good control over your finances and that negatively affects your credit score. Your credit score is a 3-digit number that shows your creditworthiness to the lenders. A credit score is calculated based on payment history, length of credit history, credit mix and the new credit apart from the credit utilisation ratio.

How to Keep Your Credit Utilisation Ratio in Check?

Overstepping the 30-40% mark on your credit card is an invitation to credit score damage. It is wise to understand what works for your credit utilisation and how to keep it in check. Here are some factors to ace the subject:

1.Lower Your Spending

The easiest and the most obvious way of keeping your credit utilisation in check is by keeping your spending in check. If you’re wise with your bills and purchases and have lower expenses on the credit card, your credit utilisation ratio will also be lower. While, on the flip side, if you keep making new purchases and bills on your credit card every month, it will become difficult to bring down your credit utilisation ratio. Cut down the larger expenses and shift them on your debit card instead. You can also shift some of the credit card expenses on the second credit card which has a lower credit utilisation.

2.Get Your Credit Limit Increased

When you get approved for a credit card, it always has a credit limit which stands for the maximum allowed credit amount that you can utilise on a credit card. This credit limit is usually calculated based on your income, credit score, and other factors. However, if you believe your credit limit is low and you’ve mounting bills and expenses to put on your credit card, you can request a credit limit increase with your bank or lender.

If you have an additional source of income, got a raise, or had your income augmentation by any means, your lender can approve your credit limit increase request. This way you can spend more on your credit card without overstepping your credit limit.

3.Keep Tracking Your Credit Cards & Expenses

If you have more than one credit card and you use all of them regularly, make it a habit to keep tracking all your credit cards and the subsequent expenses you have paid for through your credit card. The best way to do that is by regularly logging into your credit card accounts and checking for the expenses, the amount due, credit utilisation percentage, and threshold limit. If you notice a credit card is reaching or has reached its credit limit, you can transfer the expenses to another card that still has an unused credit utilisation limit. This will prevent you from going beyond the credit utilisation limit on any credit card.

4.Keep Clearing Your Outstanding Balances

If you keep carrying an outstanding balance on your credit card, this will automatically increase your credit utilisation ratio. So, if you have an outstanding unpaid balance from the previous billing cycle, make sure to clear it first before making any fresh purchases. Clearing the outstanding balances open up a fresh credit limit increase for you which helps you handle more bills at hand. It also improves your credit score to a great extent.

5.Avoid Closing Unused Credit Cards

If you’ve multiple credit cards and are not using a specific credit card anymore, it is advisable to not close it. The unused and idle limit on your credit card helps keep your credit utilisation ratio lower and increases your credit score. If you close an old credit card, it also cut shorts the life of your credit history which makes your credit score dip. If the credit card doesn’t attract any annual fees and related charges, it is recommended to keep it running.

Keeping your credit utilisation ratio below 30-40 per cent eventually goes a long way in ensuring a healthy and higher credit score. With a higher credit score, access to personal loans and new credit cards gets easier and hassle-free for you.