Credit utilisation ratio (CUR) reflects the usage a credit card with respect to its available spending limit. For example, if your credit card limit is Rs. 1 lakh, and if you utilize Rs. 70,000 in a month, your CUR is 70%.
This ratio works as an assessment parameter to gauge a person’s credit-managing habits and capacity.
Why a high CUR is not good
A high CUR reveals a borrower to be credit hungry or consistently in a cash crunch. A regularly high CUR each month shows that there is a good probability of the card user defaulting on his payments. This, therefore, negatively impacts the borrower’s credit score. Therefore you must exercise discipline and control over your credit card usage. Overuse of a credit card, especially reaching the spending limits regularly, is not advisable.
Do you hold multiple credit cards?
People who hold multiple credit cards are often unaware of the fact that this provides them to opportunity to take advantage of two cards and reduce their CUR.
The CUR is calculated separately and collectively on each credit card that have been allotted to you.
Suppose you hold an ICICI card with a credit limit Rs. 1 lakh and an HDFC card with a credit limit Rs. 50,000. If you use Rs. 40K from the first card, your CUR is 40%. But if you use 40,000 from only the HDFC card, then the CUR is at a high of 80%, and this will dent your credit score.
Balancing CUR using multiple cards
If we were to split up your spend of Rs. 40,000 between the two cards – say, Rs. 30,000 to be paid from the ICICI card, and Rs. 10,000 from the HDFC card – your CUR from the two cards would come down to 30% and 20% respectively. These are good levels to help maintain a healthy credit score.
In the table mentioned below, a card user has two cards with a credit limit of Rs 1 lakh on each. He uses Card I excessively but underutilizes Card II. The average CUR is close to 49% on Card I and only 9% on Card II.
If the card user shifts some load from Card I to Card II, he can easily keep his CUR at a comfortable 25-30% level on a regular basis.
In order to maintain a healthy CUR and reflect a healthy history of judicious credit use, it is important that you use credit cards only when it absolutely necessary.
Cut down expenditures through credit cards when you can pay through debit cards, cash, or cheque. Evaluate your monthly usage patterns of the credit card. If you’re spending more than 25% to 30% of your spending limit, request your card company to increase your limit. This would automatically bring down your CUR. Suppose you’re spending Rs. 40,000 on a limit of Rs. 1 lakh, implying a CUR of 40%. Ask the card company to raise your limit to Rs. 1.5 lakh, thus reducing your CUR to 26%.
Another important point to make here is about surrendering any of your existing cards. If you do close one card account, do consider asking for increasing spending limits on the remaining cards in order to maintain a healthy CUR. You can always decrease the limits once you take on another card in the future.
If you are in a cash crunch, then instead of using credit cards for loans, go for other borrowing instruments such as personal loans or secured loans for a long-term solution. This is because credit card debt is the most expensive form of debt out there – often twice as expensive as a personal or secured loan.
Credit cards should be used smartly to enhance your credit score and if you do not take precautions while using it, it could spoil your credit score and damage your creditworthiness, thus making it difficult for you to take on loans in the future.
The author is CEO, BankBazaar.com