Using a credit card responsibly comes with its perks—rewards, cashback, and building a strong credit score. However, one critical aspect of credit card management is keeping your credit utilization ratio (CUR) in check. Spending beyond the ideal limit can disrupt your financial planning and significantly harm your credit score. Discover easy tips to manage your credit utilisation ratio and improve your credit score. Learn how to optimise spending and keep your finances in check.
In this guide, we’ll explain the concept of the credit utilization ratio, its significance, how to calculate it, and actionable tips for maintaining an ideal ratio.
What Is the Ideal Credit Utilisation Ratio?
The recommended credit utilisation ratio is 30% of your total credit limit. If your credit card limit is ₹7 lakh, your spending should ideally not exceed ₹2.1 lakh (30% of ₹7 lakh).
Keeping your CUR within this limit indicates that you’re managing your credit responsibly without over-dependence on borrowed funds.
Understanding Credit Utilisation Ratio
For those unfamiliar with the term, credit utilization ratio is the percentage of available credit you currently use. It is key in determining your credit score, which reflects your borrowing habits and financial discipline.
Here’s the formula to calculate it:
Credit Utilisation Ratio = (Credit Card Balance ÷ Credit Card Limit) × 100
Example:
If your total credit card balance is ₹5 lakh and your credit limit is ₹10 lakh, your credit utilisation ratio would be:
(₹5 lakh ÷ ₹10 lakh) × 100 = 50%
A low CUR, preferably under 30%, is favorable for your credit score. It signals lenders that you’re financially stable and less reliant on credit, reducing your perceived risk as a borrower.
Why a Low Credit Utilisation Ratio Is Beneficial
Maintaining a low credit utilisation ratio has several advantages:
- Improved Credit Score: A lower CUR demonstrates responsible credit management and positively impacts your credit score.
- Increased Creditworthiness: Lenders perceive borrowers with a low CUR as low-risk, making it easier for them to secure loans or credit in the future.
- Better Financial Discipline: Staying within the 30% limit encourages you to manage your spending efficiently and avoid debt accumulation.
Tips to Manage Your Credit Utilisation Ratio
If you find yourself struggling to maintain an ideal CUR, here are four practical strategies to help:
- Make Timely Payments
Pay off your credit card balance before the statement closing date. This reduces the reported balance, ensuring that your CUR remains low when it’s calculated.
- Request a Credit Limit Increase
Contact your bank to raise your credit limit. With a higher limit, your CUR automatically decreases—as long as your spending habits remain consistent. For example, if your limit increases from ₹7 lakh to ₹10 lakh and your spending remains ₹2 lakh, your CUR drops from 28.5% to 20%.
- Use Multiple Credit Cards
Distributing your expenses across multiple credit cards can help keep the CUR on each card below 30%. For instance, if you have two cards with ₹5 lakh limits each, spending ₹1.5 lakh on one and ₹1 lakh on the other keeps both CURs under the ideal threshold.
- Be Cautious About Closing Cards
Closing a credit card reduces your total credit limit, which can increase your CUR. For example, if your credit limit across cards is ₹10 lakh and you close one with a ₹5 lakh limit, your CUR will double if your balance remains the same.
Final Thoughts
Maintaining a low credit utilisation ratio is a cornerstone of good financial health. It ensures lenders view you favorably, keeps your credit score intact, and helps you stay financially disciplined.
By following the tips outlined here—timely payments, raising your credit limit, using multiple cards, and managing closures—you can maintain an ideal CUR and enjoy the many benefits of responsible credit card usage.