A credit score is a three-digit figure that will influence your financial future. Your lenders use it to decide if you are worth lending money to. The credit usage ratio is one of the most crucial parts of your credit score. The ratio tells you how much available credit you use as a percentage. It can greatly improve your credit score to have a low ratio.
What is the credit utilisation ratio?
The credit utilisation ratio is the percentage of your usage against your total credit limit. As an example, if you possess a credit card with a limit of ₹1,00,000 and spent ₹30000, your credit utilisation ratio will be 30%. Preferably, it is always desirable to keep the ratio below 30%.
Why is a low credit utilisation ratio good?
There are several reasons why it is important to maintain a low credit utilisation ratio, including:
- Shows good credit management
A low credit usage ratio indicates that you handle credit responsibly. It indicates that you do not rely on credit to cover your costs and keep your finances in control. This qualifies you as a good borrower, and you will be provided with favourable loan conditions and higher credit limits.
- Reduces perceived financial risk
A high credit utilisation ratio can indicate financial stress. It means that you cannot repay your loans so that lenders will view you as a higher risk. A low ratio suggests financial stability; hence, your chances of getting a loan increase.
- Improving credit score
Credit utilisation represents a significant part of the CIBIL scoring model. Lowering your ratio can rather quickly result in improve credit score, unlike other elements like payment history, which take longer to influence your score.
Strategies to maintain a low credit utilisation ratio
You can use different methods to lower your credit utilisation ratio, like:
- Regularly balance payment
Aim to pay the full balance rather than the minimum amount due on your credit cards before the end of the month. But if you cannot pay the full balance, do pay a substantial amount to reduce the ratio.
- Increase your credit limits
If you have a good payment history, call your credit card company and ask them to raise your credit limit. This will lower your utilisation ratio while keeping your spending habits the same. However, avoid increasing your spending just because you have a higher limit.
- Avoid closing old credit cards
Leaving old credit cards active even if you never use them increases your overall available credit limit and lowers your utilisation ratio.
- Strategically using a fresh credit card
Consider getting a new credit card to distribute your expenditure over various cards. This will reduce the utilisation ratio for each card. But do not forget to use the cards wisely.
- Regularly monitor your credit
Check your credit reports and utilisation ratio regularly. Use credit monitoring software to monitor your progress and adjust accordingly.
Long-term benefits of a credit card
Enhancing your credit score with a low credit utilisation ratio opens better financial opportunities. This enables you to obtain loans at reduced interest rates, which can result in major savings in the long term. It also makes you a better candidate for obtaining a new credit card with superior rewards and benefits.
Conclusion
Recognising the beneficial effect on your credit report has always been important. Maintaining a low credit utilisation rate is a simple but powerful method of boosting your credit score. By being mindful of how you use credit, you can enhance your financial well-being and open doors to new possibilities.
