Credit Utilisation Ratio: What is it and Why Does it Matter?

Credit Utilisation Ratio (CUR), as it is generally called, essentially refers to the ratio of the credit you use, as against the maximum credit limit allowed on your card. Simply put, it is the percentage of the monthly spending of your credit limit. As is evident, your CUR will vary from one month to another. However, did you know that ideally, your CUR should never exceed the maximum limit of 30%?

To help you gain perspective on this thumb rule, let us give you an example. For instance, if the credit limit is 
1,00,000 and you spend 25,000 a month, your CUR will be calculated as follows:

Spending/Credit Limit x 100

= 25,000/1,00,000 x 100

= 25%

This will be considered to be a decent CUR.

On the other hand, if you spend 70,000 in a month, your CUR will be 70%, which exceeds the allowed limit and will thus have a negative impact on your credit score.

You may be wondering why so? The answer is simple.

When credit bureaus calculate your score, they take into account a few factors including but not limited to:

• Your Payment History
• Your Credit Utilisation Ratio
• The Length of Your Credit
• The Number of New Credit Accounts
• Your Loan Defaults

Notice, how the CUR finds a place in this list? The reason behind this is simple.

The CUR primarily reflects your spending habits as well as your credit managing ability. A high CUR indicates that you are consistently in a cash crunch or are a compulsive spender. None of these help your credit history. Hence, it is advisable that you maintain a relatively low CUR, not exceeding 30%.

That being said, you should know that exceeding the limit once or twice will not have a direct or drastic effect on your history. In fact, until you repeatedly spend beyond the suggested CUR, your credit rating will not be harmed to an extreme extent.

As discussed earlier, your CUR is likely to fluctuate with each passing month. Here, it is crucial for you to know, that the CUR, as seen by the credit bureau depends on the balance that your credit account has at the time when your Credit Card issuer submits the account report to the bureau, on a monthly basis.

More often than not, your CUR is calculated on the basis of both:

• Your total credit limit, including all the Credit Cards that you hold
• Your credit limit for each individual card

Considering this fact, it would be more favourable for you to spend up to 30% of your credit limit on each card, rather than spending 60% on your single card itself.

Tips to Improve Your Credit Utilisation

Maintaining proper credit utilisation reflects your financial discipline. Hence, if you have your expenses on control, and are regular with bill payments, you can work on improving your credit utilisation to help improve your credit score. Here are a few tips which can prove to be in your interest regarding the same:

Increase Your Credit Limit

If you have been paying all your outstanding bills in time, and have maintained a decent credit utilisation, you can place a request with your Credit Card company to increase your spending limit. Most likely, the company will readily accept your offer. In such a case, try not to raise your spending. This will immediately result in a quick decline in your CUR, thereby benefitting your credit score.

Pay Off Your Bill before the Due Date

It is one of the most straightforward measures to improve your CUR. All you need to do is pay off your Credit Card bill 10-15 days before the due date. Initially, it will seem like a daunting task, considering the financial burden, however, with time you will get used to the new payment cycle. This will help keep your balance to the minimum, thus ensuring that the monthly reports sent to the bureau exhibit your discipline.

Spend Mindfully

Credit Cards by their very nature, are liberating. They offer the much-required financial freedom to spend the money that you actually don’t have, only for you to pay it back at a later point in time. This can quickly become a trap if you are not mindful of where and how much you spend. To keep yourself in check, it is best to draw a budget beforehand and to stick to it. Yet another way to do so is to analyse your Credit Card statement every month and look for any unwanted spending. This will also help you in catching hold of any suspicious transactions. Now, isn’t this an ideal win-win situation?

Set Up Notifications

Most Credit Card companies offer the facility of sending you transaction and balance alerts through SMS or e-mails. Make sure you use this facility and read every notification, so as to ensure that you know if and when you are spending beyond a certain threshold. This will help you in abstaining from further spending, thus helping you keep your CUR at an ideal level.

We hope that you are now aware of what is credit utilisation ratio, its significance, and some simple ways to keep it to the minimum possible in a bid to enjoy a better credit score! Now that you know all of this, we believe it is the right time for you to seek the Best Credit Card Deals in India and apply for a Credit Card! After all, you deserve nothing but the best in life for all the hard work you put in!

Also Read : 5 Best Premium Credit Cards in India