If you have recently started using a credit card, you must be aware that it has a fixed credit limit and you are not supposed to spend beyond this.
Although the limit is typically generous, it is recommended not to exhaust all of it for the sake of a healthy credit score. Those users who exhaust their entire limit do not realise that it causes an adverse impact on their credit score.
What is credit utilisation ratio?
The ratio of credit utilised divided by total credit limit is referred to as credit utilisation ratio (CUR). Lower the ratio, the better it is for credit score, and higher the ratio, worse it is for your credit score.
For instance, if your credit card’s limit is ₹10 lakh and you spend ₹7 lakh, then your credit utilisation ratio (CUR) would be 70 percent.
What is the ideal credit utilisation ratio?
The ideal ratio, however, is 30 percent. This means out of your total credit limit, a cardholder is supposed to spend only 30 percent of it so that it does not impact your credit score in any adverse way.
Notably, a high CUR may impact your credit score negatively, which makes it harder for the borrowers to secure a loan or to attract favourable interest rates.
What is the way to curb its impact?
A cardholder can keep more than one credit card so that she does not need to spend more than 30 percent on any of these cards. For example, if you have two cards with ₹5 lakh each then instead of spending ₹5 lakh from one card, you can spend ₹2.4 lakh from each.
This way, your credit utilisation remains at 50 percent. Although it is still above the ideal threshold of 30 percent, it is still better than 100 percent.
Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
