Credit utilisation ratio refers to the amount of credit you are using compared to the total credit available to you. It is an essential factor that can significantly impact your credit score. In this blog, we will discuss what a credit utilisation ratio is, how it is calculated, how it affects your credit score, and what a good credit utilisation ratio is.
What is Credit Utilisation Ratio?
Credit Utilisation Ratio, also known as Credit Utilisation Rate, is a critical factor that lenders consider while evaluating an individual’s creditworthiness in India. It reflects how much of an individual’s available credit they are currently using and can have a significant impact on their credit score.
In India, credit bureaus like CIBIL, Equifax, and Experian maintain credit reports of individuals that provide information on their credit history, including credit card usage, loan repayment behavior, and credit inquiries. One of the important factors that these credit bureaus consider while calculating an individual’s credit score is their Credit Utilisation Ratio.
A high Credit Utilisation Ratio indicates that an individual is heavily relying on credit to meet their financial needs, which can negatively affect their credit score. On the other hand, a low Credit Utilisation Ratio suggests that an individual is using credit responsibly, which can have a positive impact on their credit score.
It is essential to understand that Credit Utilisation Ratio is just one of the many factors that lenders consider while evaluating an individual’s creditworthiness. Other factors, such as payment history, credit mix, credit inquiries, and length of credit history, also play a significant role in determining an individual’s credit score.
How to Calculate Credit Rate?
Calculating your credit utilisation ratio is simple. You need to divide the total amount of credit you are currently using by the total amount of credit available to you. For example, if you have a credit card with a limit of $10,000, and you have a balance of $2,000, your credit utilization ratio would be 20% (2,000/10,000 x 100).
How Does Credit Utilisation Affect Credit Scores?
The credit utilisation rate is a crucial factor that affects your credit score. The credit bureaus consider credit utilisation ratio while calculating your credit score, and a high ratio can have a negative impact on your score. Generally, a credit utilisation ratio of above 30% is considered high and can negatively impact your credit score.
What is a Good Credit Rate?
A good credit utilisation rate is one that is below 30%. If your credit utilisation ratio is below this threshold, it means that you are using credit responsibly and are not relying too much on credit to meet your financial needs. Having a low credit utilisation ratio can positively impact your credit score and make it easier for you to get approved for credit in the future.
How Does Credit UtlilizationRate Affect Credit Scores?
- The credit utilisation rate is a crucial factor that lenders consider while evaluating your creditworthiness. It reflects how much of your available credit you are using and can impact your credit score.
- A high credit utilisation rate can indicate that you are relying too much on credit to meet your financial needs, and this may negatively affect your credit score. On the other hand, a low credit utilisation rate indicates that you are using credit responsibly, and this may have a positive impact on your credit score.
- It is essential to understand that the credit utilisation rate is just one of the many factors that lenders consider when evaluating your creditworthiness. Other factors, such as your payment history, length of credit history, and types of credit you have, also play a significant role in determining your credit score.
- In addition to keeping your credit utilisation rate low, there are other ways to maintain a healthy credit score. These include paying your bills on time, keeping your credit accounts open, and monitoring your credit report regularly to check for errors or fraudulent activity.
- To calculate your credit utilisation rate, you need to add up the balances on all your credit accounts and divide the total by your total credit limit. It is important to note that some lenders may use the balance reported on your credit report, which may not reflect your current balance.
How to Maintain a Good Credit Utilization Ratio?
To improve your credit utilization ratio, it’s generally best to reduce your outstanding debt. This can be done by following these steps:
- Create a monthly budget: Make a budget to manage your finances and allocate any extra earnings towards paying down your debts.
- Pay down revolving credit balances: Focus on paying off the balances on your credit cards and other revolving credit accounts. Try to make payments as soon as you use your credit card to keep your balances low.
- Pay your bills promptly: Find out from your lender when they report your activity to the credit bureaus, and make your payments before that date to ensure that the lower balances are reflected in your credit reports.
Additionally, you may consider increasing your credit limits as another approach to improve your credit utilization ratio. This can be done by:
- Opening a new credit card: If you are approved for a new credit card, it will increase your total available credit, which can help lower your credit utilization ratio. However, be cautious about taking on additional credit and ensure that you can manage the new credit responsibly.
- Requesting a credit limit increase: You can ask your current credit card issuers to increase your credit limits. This can be beneficial if you have a good payment history and improved financial situation. However, keep in mind that requesting a credit limit increase may result in a temporary drop in your credit scores due to a hard inquiry on your credit reports.
Remember, while increasing your credit limits can help improve your credit utilization ratio, it’s important to use credit responsibly and avoid overspending. Always make sure you can comfortably manage the debt you take on and repay it on time.
Having a credit utilization ratio at or below 30% is generally considered favorable for your credit scores and can have a positive impact on your overall financial well-being.
How Closing a Credit Card Can Affect Your Credit Utilization Rate?
Closing existing credit card accounts can have a negative impact on your credit scores, similar to opening new cards. When you close a credit card, your total available credit limit decreases. If you have no outstanding balances on any credit cards, your credit utilization rate remains at zero, and closing an account won’t affect that rate. However, closing an older credit card account may have a negative impact on the length of your credit history, which can impact your credit scores.
If you carry a balance and close a zero-balance credit card account, it can impact your credit utilization rate. For example, if you have two cards with a total credit limit of INR 10,000 (INR 5,000 each) and owe INR 5,000 on one card, your credit utilization rate is 50%. If you close the card with a zero balance, your total available credit decreases to INR5,000, resulting in a credit utilization rate of 100%.
It’s important to remember that your credit utilization rate is just one factor among many that influence your credit scores. Understanding how it works and effectively managing your credit utilization can help you make informed decisions to maintain and improve your credit health.
Credit Limit Conundrum
A high credit utilization ratio indicates a tendency to utilize credit cards up to their maximum limits. Credit bureaus consider the credit card utilization ratio as a significant factor in determining credit scores. Banks typically prefer to be cautious when issuing credit cards by setting lower credit limits. They periodically review credit card limits, usually every 12 to 18 months, based on card usage.
It is advisable not to miss the opportunity when banks offer to increase the credit card limit. It is recommended to keep credit card utilization below 30% to 40% of the credit limit. When you request a higher credit card limit from your bank, they will assess your credit report to evaluate your credit status and determine your creditworthiness.
Example of Credit Utilization Ratio
Here’s an example of how to calculate the credit utilization ratio based on the provided information:
Total revolving credit limit: INR 5,000 + INR 10,000 + INR 8,000 = INR 23,000
Total credit used: INR 1,000 + INR 2,500 + INR 4,000 = INR7,500
Credit Utilization Ratio: (INR 7,500 / INR 23,000) x 100 = 32.6%
So, the credit utilization ratio in this example is 32.6%.
Is It Good to Have No Credit Utilization?
While having no credit utilization may not negatively impact your credit score, it may not necessarily improve it either. Creditors typically prefer to see that you can effectively manage credit and responsibly pay off credit card debt. Therefore, maintaining a low credit utilization may be more beneficial for your credit score compared to having no credit utilization at all.
Related Terms
Permanent Account Number (PAN) is a unique 10-digit alphanumeric number issued by the Income Tax Department of India to individuals and entities for identification and tax purposes.
Scheduled Banks are banks that are listed in the Second Schedule of the Reserve Bank of India Act, 1934. These banks are eligible to receive certain benefits from the central bank, such as access to refinance facilities and clearing services.
Merchant Banking refers to the services provided by banks and financial institutions to companies and individuals for raising capital, managing investments, and providing advisory services related to corporate finance.
Showrooming is the practice of visiting a physical retail store to examine a product in person and then purchasing it online, often at a lower price.
Cramming is a study technique where individuals attempt to memorize a large amount of information in a short period of time, typically before an exam.
Country Club Billing was a billing system previously used by credit card companies, where customers were charged a monthly fee regardless of their usage of the card’s benefits and services. This billing model has become less common in recent years.
Conclusion
Hence, the credit rate is an essential factor that affects your credit score. By keeping your credit utilisation rate low, you can improve your credit score and increase your chances of getting approved for credit in the future. Remember, using credit responsibly is the key to maintaining a healthy credit score. Visit Vakilsearch for more information.
FAQs
What is the ideal credit utilisation ratio which I should keep?
It is advisable to keep your credit utilization ratio as low as possible. The ideal credit utilization ratio is generally recommended to be less than 30%. This means that you should aim to use no more than 30% of your available credit limit.
Is the credit utilisation ratio calculated for each credit account or all of them in total?
The credit utilization ratio is calculated based on the total debt across all your revolving credit accounts and the total credit limit available to you. It considers the overall utilization of your credit across all accounts.
How can I keep my credit utilisation ratio at the lowest?
To keep your credit utilization ratio low, you can follow these steps: - Make multiple payments throughout the month. - Pay off your credit card bills on the same day as your purchases, if feasible. - Use more than one credit card to distribute your credit utilization. - Keep your credit accounts open, even if you're not actively using them. - Request an increase in your credit card limits, which can help lower your utilization ratio.
My credit utilisation is over 70%. Is that bad for my credit score?
Having a high credit utilization ratio, especially above 70%, can have a negative impact on your credit score. It is generally advised to keep your credit utilization ratio below 30%. However, if keeping it under 30% is not feasible, aim to keep it below 50% to minimize the potential negative impact.
What will happen if I use more than the credit limit that I have on my credit card?
If you exceed your credit card's credit limit, you may be charged penalties or fees by the credit card issuer as per the terms and conditions of your card agreement. It's important to stay within your credit limit to avoid these additional charges.
What is a credit utilization ratio?
The credit utilization ratio refers to the percentage of your total available revolving credit that you are currently using. It is a measure of how much of your credit limit you have utilized and is an important factor in determining your credit score.
Is it important to have a good credit utilization ratio?
Maintaining a good credit utilization ratio is important for managing your credit responsibly. It indicates that you are using credit wisely and not relying heavily on borrowed funds. A lower credit utilization ratio is generally seen as a positive factor by lenders and can help improve your credit scores.
How is the credit utilization ratio calculated?
The credit utilization ratio can be calculated on a per-credit-card basis by dividing the amount you owe on a specific card by its credit limit. It can also be calculated on a total basis by dividing the sum of your outstanding balances on all your credit cards by the sum of their credit limits.
How can you lower your credit utilization ratio?
To lower your credit utilization ratio, you can take the following steps: - Pay off existing balances. - Avoid making large purchases that would significantly increase your credit utilization. - Make more frequent payments to reduce outstanding balances. - Consider requesting a credit limit increase, which can help lower your utilization ratio if your spending remains the same.
Is a lower credit utilization ratio better?
Yes, a lower credit utilization ratio is generally better for your credit scores. A lower ratio demonstrates responsible credit management. However, it's important to note that some utilization is still necessary to show that you are actively using credit.
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