The credit utilization ratio (CUR) is the ratio of your entire credit limit divided by the total debt on all of your credit cards. The more you spend on your credit card, the higher will be your CUR. Credit bureaus give the second highest weightage to CUR when calculating your credit score. When you check your CIBIL score online and download the detailed report, you can find the CUR for each of your cards mentioned on it. If you have been exhausting most of your credit limit on the cards, it could be having a negative impact on your credit score.
Here we will discuss how the Credit Utilization Ratio (CUR) impacts your credit score along with a few ways how you can reduce your CUR. But, before that, let us first understand how CUR is calculated.
Calculating Credit Utilization Ratio
Credit Utilization Ratio = (Total Outstanding Amount/Total Available Credit) X 100
For instance, if you own 2 credit cards X and Y with limits of 70,000 and 2,00,000 respectively. Your total available credit becomes Rs 2,70,000. Now if you have outstanding bills of Rs 15,000 on X and Rs 40,000 on Y your total outstanding amount will be Rs 55,000. Putting the same in the above-mentioned formula, you get a CUR of 20%.
Generally, if you put a lot of spends on your credit cards and pay off the total due on time, it would not impact your credit score so badly. On the other hand, if you frequently max out your cards and revolve the balances to next billing cycles, it could lead to a high CUR and ultimately reduce your credit score. High CUR also shows that you are highly dependent on credit which could make it difficult for you to get approved for loans or credit cards in future. Usually, a CUR of 50% or less is considered good; the lower it is the better.
Ways to Keep Your CUR Minimal
Your credit utilization ratio must be kept under check to build and maintain a good credit score. Here are some steps that you can take to keep your credit utilization low:
1. Pay Your Credit Card Balance in Full
You should try to repay the whole amount spent on your credit card each month. Leaving the
balance unpaid will accrue interest and other penalties. With additional charges and penalties,
the outstanding amount will continue to rise, impacting your credit utilisation ratio. Try to pay as much as you can towards your debt while keeping new purchases as low as possible, in order to maintain a low CUR.
2. Try Increasing Your Credit Limit
If you are finding it difficult to maintain a low utilization ratio on your cards, it might mean that the available credit is not sufficient for your expenses. In this case, you can request a limit increase on your card. If you have a good CIBIL score and you repay your credit card balance in full every time, your credit card provider may offer you an option to increase your credit limit without even requesting for the same. An increased limit will reduce your CUR.
If limit increase is not an option, you can also apply for a new credit card. The additional credit limit you get will reduce your overall CUR and improve your credit score.
Suggested Read: Top 5 Tips On Improving Your Credit Score
3. Do not Overspend
Having a credit card with a high credit limit does not imply that you must utilize the entire amount. You should always try to use only up to 50% of your credit limit, so you must control your expenses accordingly. Even if you have surpassed the said threshold, you should pay your bills timely that will add to your available limit and improve your credit score.
4. Set up Automated Payments
If you find it difficult to remember multiple due dates, you can activate automated payments for the same. This way every month your payments will be automatically made without you having to worry about missing payments on the due date. This way you will be able to make timely payments without any late fees incurred, thereby maintaining a good payment history and a low credit utilization ratio.
The Bottom Line
The Credit Utilization Ratio, which reflects the total credit limit that you have utilized using your credit cards, has a significant impact on your credit score. Keeping a low ratio is critical for maintaining a decent credit score. Though there is no rule as to what percentage of CUR is good, you should try to control your expenses if you get close to maxing out your credit card every month.
Maintaining your credit ratio as low as possible can help you achieve a good credit score, which will allow you to apply for credit cards with better features and open the doors to other types of credit.