Credit card PAYMENTS are increasing with more and more people paying their monthly utility bills, shopping online and purchasing electronic items. Credit cards give you more flexibility to use funds on the go. Some people manage their entire expenses on credit cards as it helps them keep track of their spending every month. When their salaries get credited at the end of month or start of the next month, they repay their credit card bills.
Your credit cards are structured in such a way that it helps credit agencies calculate your expenses and assign you a score basis this and some other factors. Your payment history, credit utilisation, length of credit history, credit mix and new credit are key parameters to decide your credit score. To calculate your Credit Utilisation Ratio (CUR), divide your total credit card balances by your total credit card limits and then multiply by 100 to get the percentage.
Credit utilisation ratio
A significant factor that shows your credit card expenses going out of control is the CUR. It is the percentage of credit limit one uses on their credit card. Maintaining a healthy CUR is crucial for a good credit score. For example, if you have two credit cards with a total credit limit of Rs 1,00,000 and you currently have Rs 30,000 as the combined outstanding balance on both cards, your Credit Utilisation Ratio would be: (Rs 30,000) / (Rs 1,00,000) x 100 = 30%.
Adhil Shetty, CEO, Bankbazaar.com, says, “A CUR of less than 30% is recommended for consumers looking to maintain a good credit score. A high CUR indicates that the consumer is using too much of their available credit, which can negatively impact their credit score. Therefore, it is essential to use credit cards responsibly.”
Here is why CUR is crucial for keeping your finances healthy.
Impact on credit score
Credit bureaus like CIBIL, Experian, Equifax, and CRIF calculate credit scores for individuals based on various factors. CUR is one of the critical factors influencing your credit score. When you apply for new credit, such as a loan or another credit card, lenders consider your CUR as part of their assessment. Lower CURs are seen favourably because they indicate responsible credit management and a lower risk for the lender.
Shetty suggests, “Consumers must set a budget, pay off balances in full each month, consolidate credit card debt, and monitor expenses regularly to effectively manage their credit card expenses.”
Credit limit increase
Maintaining a low CUR can improve your chances of getting a credit limit increase on your existing credit cards. A higher credit limit will increase your available credit and further reduce your CUR, potentially benefiting your credit score.
Keeping a low CUR can help you avoid high interest charges on credit card balances, especially if you carry a balance from month to month.
If your expenses are higher, you can ask for an increase in your credit limit. Sometimes card issuers offer higher credit limits to consumers who pay their debts on time. This is also one of the ways to keep your CUR under 30%. You can also apply for another credit card to distribute your expenses. Understanding how credit utilisation works is crucial as it is one of several aspects that can impact your creditworthiness. By managing your credit card expenses, you can make it work in your favour.
SMART SPENDING
* Calculate your Credit Utilisation Ratio (CUR) by dividing total credit card balances by total credit card limits and then multiplying it by 100
* When you apply for a loan or another card, lenders check your CUR
* If your expenses are higher, you can ask your lender for an increase in your credit limit