There are multiple factors which collectively constitute responsible credit card usage. Among those, Credit Utilisation Ratio (CUR) is one of the most important. It is the percentage of revolving credit you have used from your total credit limit and has a direct bearing on your credit score.
For example, if you have a credit limit of Rs 5 lakh on your credit card, of which you spend Rs 50,000, your CUR would be 10%, i.e. Rs 50,000/Rs 5 lakh. A low CUR of up to 30% indicates good credit management and can improve your credit score. But, a regularly high CUR points towards overspending, thus impacting your credit score.
How is CUR calculated?
When it comes to CUR, a higher credit limit can help lower your utilisation ratio. For instance, you have three credit cards, each with a credit limit of Rs 1 lakh, giving you a total limit of Rs 3 lakh. If you spend Rs 30,000 using one of these cards, your CUR is 10%, i.e. credit used (Rs 30,000) divided by the total available credit (Rs 3 lakh). If you close one of the three credit cards, your limit will reduce from Rs 3 lakh to Rs 2 lakh. Now, if you spend Rs 30,000 using one of the remaining two credit cards, your CUR will be 15%, i.e. Rs 30,000/Rs 2 lakh.
How does CUR impact your credit score?
Your Credit Utilisation Ratio directly impacts your credit score. A CUR of up to 30% is ideal and indicates healthy credit management. On the other hand, regularly having a CUR above 30% can be a red flag for lenders who associate it with financial indiscipline and possible future loan default. However, sporadic instances of a high CUR are unlikely to impact your credit score only if you make timely bill payments in the following billing cycles, thus allowing your credit score to recover.
How to keep your CUR low?
There are multiple ways you can keep your CUR in check. Enhance your credit limit to maintain a low CUR. Your credit card issuer may offer you a higher limit if you have regularly made timely bill payments or have reported an increase in income.
Having multiple credit cards is another way to enhance your limit and keep your CUR low. However, ensure that you track the due dates for all cards to avoid defaulting on payments. If you exceed the 30% CUR during a billing cycle, don’t wait till the due date to clear the bill, but make small payments to bring down the CUR. Consider taking a short-term loan for high-value purchases instead of charging them to your credit card to reduce stress on your credit utilisation ratio.
(The author is CEO, Bankbazaar.com)