Most Credit Cards come with a credit limit. The credit limit is the extent up to which you can spend on the card. Banks and Credit Card issuers estimate your limit based on various factors such as income, repayment capacity, your credit score, and so on. However, credit experts say that you should never spend up to the maximum limit on your credit. It can go against you.
Let us see why you should never max out your Credit Card.
Credit utilisation ratio (CUR) is an important factor that determines your credit score. The higher the usage, the lower will be your credit score. This example will clear the matter –
If youhave a Credit Card limit of 1 Lakh and your outstanding balance is 80,000, your CUR is 80%. Of course, the banks allow you to use the card up to the full limit, but higher CUR on the date of reporting can work against your favour.
The credit bureaus, as well as the banks, deduce that your financial position is not sound enough thereby forcing you to use your Credit Cards more frequently. Of course, you can pay the bills in full and bring the CUR to zero.
It depends on the credit policies of the banks. Some banks are okay with a CUR of 50% whereas some banks insist on the maintaining the ratio at around 30% to display sound financial health. The credit bureaus also accept the figure of 30% as the ideal CUR.
The ideal ratio is around 30%, but credit bureaus are comfortable with ratios in the range of 50% provided you clear the entire outstanding bills on time without default. Under such circumstances, you should contact your bank and seek a higher limit, especially if you are eligible otherwise.
The CUR plays a significant role in determining the credit score. Maintaining the rate at around 30% is perfect. If you go below this ratio, it shows that you are not in need of any credit. It can also affect the credit score, but the effect will be less as compared to maintaining CUR above 30%.
As your CUR increases, the minimum amount payable on the Credit Card increases. Remember that the minimum amount due is a facility that allows you to avoid incurring late payment charges. Your liability on the card does not come down. On the other hand, the banks start levying interest at the contracted rate. You lose the interest-free period whereby you have to pay interest from the date of incurring the debt up to the time of payment.
A higher CUR indicates that you are desperate for credit. It also shows that you are not able to manage your Credit Cards properly.
Also Read: Should You Get a New Credit Card?
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