Maintaining a low credit utilization ratio (CUR) is essential for achieving good credit health and a high credit score. This vital number is one of the top considerations of lenders at the time of loan approval. Lenders and creditors wish to know the average percentage of the available credit limit the borrower uses. They calculate and assess CUR to gather insights into the borrower’s financial health and creditworthiness.
This article explores what a credit utilization ratio is, how to calculate credit utilization, and how to lower it to improve loan eligibility and elevate your credit score.
What is the Credit Utilisation Ratio?
A credit card comes with a credit limit. You can shop or use the credit card within the pre-fixed credit limit. However, you don’t have to use the entire available credit limit. You must ensure that you use only a portion of the credit limit.
The percentage of the credit limit you use is the credit utilization ratio (CUR). For example, if you have a credit limit of Rs 1 Lakh, this does not mean that the credit card company expects you to use the entire Rs 1 Lakh. The lower the percentage of using the credit limit, the better for your credit health. A higher CUR reflects credit-hungry behavior, which can lower your credit rating.
Why is the Credit Utilization Ratio Important?
Here is why the credit utilization ratio is important:
- The credit utilization ratio plays a key role in determining your credit score. A high CUR can lower your credit score and vice versa.
- A lower CUR demonstrates responsible credit behavior and enhances your creditworthiness.
- When you apply for credit, lenders consider your CUR and assess your ability to repay the loan. A high CUR signals an inability to manage finances, and you may appear as a riskier borrower.
- A low CUR may also encourage your credit card issuer to increase your credit limit.
How to Calculate Credit Utilisation Ratio?
The credit utilization ratio is the total credit limit a borrower uses compared to the total credit limit the credit issuer has assigned. It is essential to know how to calculate the credit utilization ratio. Here is how to calculate credit utilization:
- Keep the reports of all your credit accounts handy.
- Add all the outstanding balances and credit limits.
- Divide the total balances by the total credit limit.
- Multiply the result by 100 and get your CUR percentage.
Hence,
CUR= (Total outstanding on all credit cards ÷ Total credit limit) × 100
Use this example to understand how to calculate the credit utilization ratio if you use two credit cards:
- Suppose your two credit cards have credit limits of Rs 50,000 and Rs 25,000, respectively. Your outstanding balances are Rs 20,000 and Rs 10,000 respectively. Then,
- Total outstanding balance of two credit cards: Rs. 20,000 + Rs. 10,000 = Rs. 30,000
- Total credit limit of the two credit cards: Rs. 50,000 + Rs. 25,000 = Rs. 75,000
- CUR: (30,000 / 75,000) x 100 = 40%
What is an Ideal Credit Utilisation Rate?
Different credit bureaus have different CUR cut-offs. If you want to know the best credit utilization ratio, then be informed that a credit utilization below 30% is ideal. So, for a credit card having a credit limit is Rs 1 Lakh, your utilization should not be over Rs 30,000.
How to Reduce Your Credit Utilisation Ratio?
Now that you know that it is important to maintain a low credit utilization, here are a few tips for you to lower your CUR:
1. Control Your Expenses
People with a high credit limit must avoid the temptation of exhausting the entire credit limit. It is vital to keep track of your expenses and remember the 30-70 rule, where you don’t use more than 30% of the credit limit on one card. If you have to shop heavily or have more expenses in some months, try to balance the same with other cards. Please avoid using the same card until you pay off its bill or the minimum amount. This will keep your CUR below 30% and prevent your credit score from diminishing.
2. Pay Credit Card Bills Fully
Repay your credit card dues in full each month. By regularly clearing your credit card bills each month, you will be able to maintain a healthy credit utilization ratio. Even substantial payments each month will help keep your CUR under control. When you cannot clear your dues fully, keep a low outstanding balance, as it leads to a low CUR.
3. Set up Balance Alerts
If you are unable to manage your credit, set up balance alerts. The issuer can send these alerts via text message or email when the credit utilization ratio crosses a certain point, such as 30%, 50%, etc.
4. Don’t Use All Credit Cards
One of the best techniques for reducing your credit utilization rate is to ensure zero balance on some credit cards. If you are on a credit utilization reduction spree, avoid using a couple of credit cards for a few months. This tip will increase your available credit limit and reduce your credit utilization ratio. Simultaneously, avoiding overspending on other cards is also important to keep CUR low.
5. Credit Limit Increase
If you have been using your credit card responsibly and paying your bills on time, you can request that your credit card agency increase your credit limit. An increased credit limit will automatically lower your CUR, provided you keep your usage the same as before.
6. Don’t Close your Credit Card
If you have a credit card with a zero balance and don’t use it, it means a credit utilization ratio of 0%. Closing the same would decrease your credit availability and limit and increase your credit utilization. Connect with duefactory.com and know more.
7. Get a New Credit Card
Getting a new credit card will increase your credit limit and bring down your credit utilization. Again, it would help if you remembered that you should not increase your expenditure.
Wrapping up
The credit utilization ratio is one of the most critical factors credit bureaus use to calculate your credit score. Your current CUR is an important metric determining your credit score and eligibility for future loans. A high credit utilization ratio represents credit-hungry behavior and a high dependency on credit to manage finances. You must ensure to keep this ratio below 30% to maintain a high credit score, good credit rating, and a high creditworthiness for loan eligibility.
Disclaimer: This article provides a general guide to the subject matter. You should seek specialist advice about your specific circumstances.
FAQs
1. What is the Credit Utilization Ratio?
Ans. Credit Utilization Ratio or CUR is a percentage of the credit you use compared to your total credit limit.
2. Why is the credit utilization ratio important?
Ans. CUR a significant in determining your creditworthiness, credit score, and overall credit health. It also affects your ability to take loans in the future.
3. Is a low credit utilization ratio a better or a higher one?
Ans. The lower your credit utilization ratio, the better it is.
4. What is the best credit card utilization ratio?
Ans. A credit utilization ratio of up to 30% is the best credit utilization ratio.
5. Is 50% credit card utilization good?
Ans. A 50% credit card utilization is not as good. Try to bring it down to 30% and reach the ideal figure. Duefactory.com can help you in this regard.
6. What is the 30-70 rule for credit cards?
Ans. Remember to use only 30% of this limit when you get a credit card.
7. What are the best ways to lower my credit utilization?
Ans. To lower your CUR, you must avoid overspending and using all credit cards, repay the dues in full, increase your credit limit, apply for a new credit card, etc.
8. Is the CUR calculated for each credit account or their total?
Ans. The credit utilization ratio is calculated by adding the total debt on all credit accounts and the total credit limit.
9. How to calculate your credit utilization ratio?
Ans. The CUR can be calculated using the formula-
CUR= (Total outstanding on all credit cards ÷ Total credit limit) × 100