The credit utilization percentage on your credit card, also called the credit utilization ratio, indicates the total amount of credit you have utilized out of your total available credit. This percentage is primarily calculated on credit card credit limit, but when seen from the context of your credit report, includes all types of credit limits available for you as an individual.
key factors in calculating your credit score:
Credit utilization ratio carries 30% weightage while calculating your credit score. A bad credit utilization percentage will cause the following hurdles for you –
Difficulty in getting quick approval for your loan application
Not getting the desired loan amount
Being offered a high interest rate
Unable to get the requested repayment tenure
No offers for any new credit card or upgrades on existing cards
Why do lenders give so much weightage to this simple ratio? Read on to know more.
Credit utilization ratio is simply the gap between how much credit you have available and how much credit you've used so far. This ratio plays a significant role in calculating your credit score because it displays your spending patterns as well as your dedication to maintaining a healthy credit balance in case of an emergency. It's best to maintain this ratio below 30%, according to experts.
For example, if you have a credit limit of Rs.1 lakh and have utilized Rs. 10,000 out of it, your Credit Utilization Ratio will be
(10,000/1,00,000) * 100 = 10%
Remember that your credit utilization ratio is primarily based on ‘Revolving Credit’ like credit cards and line of credits. It does not factor in installment loans like home loans or car loans. Also, your credit utilization ratio is calculated on the total amount of credit you have available, not just one credit card. So, if your total available credit from all of your credit cards is Rs. 5 lakhs, but you've only used Rs. 10,000, your credit usage ratio is only 2%, which is positive for your credit score.
If you have a low credit utilization score, it means you are not utilizing the whole of your available credit. Credit rating agencies normally interpret this as an indication that you're managing your credit well by not overspending, and that keeping your expenditures in line can help you improve your credit scores. Higher credit scores make it easier to obtain more credit, such as home loans, car loans, and credit cards with better terms, when you need it.
What Is The Ideal Credit Utilization Percentage To Achieve A Good Credit Score?
A 30% Credit Utilization Ratio has long been seen to be beneficial to your credit score. However, in recent years, experts have been increasingly advocating for a Credit Utilization Ratio of 10 to 20%.
They believe that a Credit Utilization Ratio of around 10% is ideal for obtaining a high credit score.
How To Maintain A Low Credit Utilization Rate?
Though we emphasize on maintaining a low credit utilization rate, users have to ensure that it is not at 0%. That wouldn’t help your credit score either because lenders want to see you using the credit and managing it efficiently. Not using the credit at all is actually not considered as fiscal responsibility.
So let us look at ways to lower your credit utilization rate without making it 0%:
- Any credit card balances that are too high should be paid off. You might choose for a balance transfer to pay them off faster and for less money.
- Maintain your credit card use even if you don't have any large bills. Make no large-ticket purchases that will increase your credit usage percentage.
- Keep any old credit cards open. Make small transactions on them and keep them up to date. Closing them will lower your credit usage ratio by reducing your total available credit.
- Spread Out Your Charges Over Different Cards. This will result in lower balances on each of the cards instead of over 30% utilization on a single card.
- Stay updated on your card payments. Ensure that you set reminders to pay off the bill on time.
- Request for a credit limit increase. You don’t have to stay with the same credit limit for years. Based on your income increase, the credit card company will increase the credit limit on your card so that you can continue making the same spend on the cards and your utilization ratio will have come down.
- Pay money into your credit card whenever you have surplus. You don’t have to wait for the payment due date to make the full payment. You can make multiple payments on your card to keep the credit utilization ratio in check.
Credit cards require disciplined money management to prevent falling into a debt trap. Credit cards are a great way to build your credit score when you use it wisely and make timely payments. Pay attention to your credit utilization percentage to ensure that your credit score stays on top.
FAQs for Credit Utilization Percentage Impact On Credit Score :
1:What is an ideal credit score?
A score of 700 and above is considered an ideal credit score.
2:What is the ideal credit utilization percentage?
Experts suggest that one should maintain a credit utilization percentage of 30%.
3:Will a credit utilization of 0% help me?
No, a 0% credit utilization percentage is not helpful to your credit score because lenders want to see you using the credit and managing it efficiently. Not using the credit at all is actually not considered as fiscal responsibility.
4:Should I just have one credit card to have a healthy credit utilization ratio?
It’s better to have multiple cards and spread your spend so that you can achieve a lower credit utilization ratio on all the cards.
5:Is my home loan payment taken towards my credit utilization ratio?
Credit utilization ratio is calculated only based on revolving credit. So only your credit cards and lines of credit are taken into account. Installment loans like home loans or car loans are not considered.