Credit Utilization Ratio: Meaning, Calculation & How to Improve

Are you paying volumes of your hard-earned money on your car loan or credit cards only because of a single number on your credit report? That number is your credit utilisation ratio which can influence your financial future. Better knowledge and understanding of how to tackle this ratio on credit scores can be instrumental in unlocking better interest rates and saving money.

What is the Credit Utilisation Ratio?

Credit Utilisation is your pattern and frequency of the revolving credit provided on credit cards. So, the more you spend on your credit cards, the credit utilisation gets higher. The credit utilisation ratio is typically represented as a percentage.

The other name of Credit Utilisation is Utilisation Rate. The utilisation rate is a ratio that represents the amount of credit you are using to the total amount of available revolving credit. This refers to the total credit on all your credit cards to the total credit limit available.

How do credit card spending habits impact your CIBIL score?

If you miss the date of your credit card bill payment due date, it will negatively impact your CIBIL score. The system is so clever that even a single missed payment shall be recorded in your credit history and affect the CIBIL score. It will also record the number of days of payment delays in the report. So, if you make a habit of making payments on time because you already have a low CBIL score that shall be an important step. If you keep an on-time payment schedule for 6 -8 months, you will see a positive change in your ClBIL score.

How to Calculate Credit Utilization Ratio?

Credit utilisation ratio = (Total outstanding on all credit cards / Total credit limit) X 100

The formulae here are used to calculate the Credit Utilisation Ratio. 

You can use a Utilisation Ratio Calculator for better results. Here is an example: Say, you have two credit cards, with a total limit of Rs.1 lakh, and an outstanding balance of Rs.50,000 on one card and Rs.0 on the other card.

Then, the credit utilisation ratio is calculated by dividing the total outstanding on both cards (Rs.50,000 + Rs.0) by the total credit limit on the cards (Rs.1 lakh).

Credit utilisation ratio on your card is (1,00,000 ÷ 50,000) × 100 = 50%

Your credit utilisation ratio is 50%, meaning you're using half of the total credit available for you.

Credit utilisation ratio can also be calculated b for each of your credit cards and is called the per-card ratio.

What is a Good Credit Utilization Ratio?

It is noticed that different agencies have different cut-offs to determine the ideal utilisation ratio. However, a good credit utilisation rate is less than 30% of the total limit according to experts. So, to look creditworthy, one needs to keep their utilisation ratio low.

For example, if your total credit limit on all your credit cards is Rs.1 lakh, your total outstanding on all the credit cards at any point in time should not exceed Rs.30,000.

Good Credit Utilisation Ratio - Below 30% of the total credit limit

How Does Credit Utilization Ratio Work?

If you have a low credit utilisation ratio, it indicates that you are depending less on credit and this makes credit agencies think that you are good at managing your credit and your spending is within limits. So, this helps you in securing a high CIBIL score. Now high credit score enables you to secure other credits like auto loans, home loans, personal loans, etc. much easier. Conversely, a high utilisation ratio can send a message to your potential creditor that you are stressed about managing your finances leading to less or no eligibility for a loan.

How Credit Utilization Impacts Borrowers

The credit utilisation ratio for borrowers will differ over time depending on the purchase and payments they make. The borrower's outstanding amount due on a revolving credit account is reported to credit agencies several times over a month.

A borrower’s credit utilisation ratio can be affected by the timeframe used by lenders for reporting credit balances to an agency. So, borrowers need to be patient as it may take 2/3 of credit statements for credit utilisation levels to drop when the debt is being paid.

Will it be good to have No Credit Utilization?

Having no credit utilization is not necessarily good. While it may not affect your CIBIL score, it may not help it because creditors want to perceive that you can manage credit and pay off your credit card debt. So, a low credit utilization may be better for your CIBIL score than no credit utilization.

How Can I Improve My Credit Utilization?

To improve your credit utilization, firstly try to pay down your debts under 30% of your available credit. The other ways are by utilizing more credit by requesting a higher limit or opening a new card, or you can keep a card with the balance fully paid open but refrain from using it. The best way to improve your credit utilization is to pay off your debt on time.

FAQs

Q1. Is there an ideal credit utilisation ratio I should keep?

Ans. Ideally, it is advisable to keep the credit utilisation ratio as low as possible, less than 30%. This helps maintain a healthy CIBIL score.

Q2. Is the credit utilisation ratio calculated for each credit account or all of them in total?

Ans. The credit utilisation ratio is calculated based on the total debt on all the revolving credit accounts and the total credit limit that is available to you.

Q3. How can I keep my credit utilisation ratio at the lowest?

Ans. Here are some ways to do this.

• make several payments during the month
• pay off the bills (as per feasibility) on the same day of purchase
• use more than one credit card
• keep your credit accounts open, and ask for an increase in your credit card limit

Q4. If my credit utilisation is over 70%, will it be bad for my credit score?

Ans. Yes, high credit utilisation is bad for your credit score. It is advised to keep the utilisation under 30% of the overall credit limit. However, if it is not possible to keep it under 30%, it is advised to keep it at least under 50%.