What is Credit Utilisation Ratio?
The Credit Utilisation Ratio, or CUR, is a simple percentage that shows how much of your available credit card limit you are using. It is calculated by dividing your total outstanding credit card balance by your total credit card limit, and then multiplying
by 100. For example, if you have a total credit limit of ₹1,00,000 across all your cards and your current outstanding balance is ₹25,000, your CUR is 25%. It's a key metric lenders use to gauge how reliant you are on credit.
Why the 30% Rule is a Big Deal
Financial experts and credit bureaus consistently recommend keeping your credit utilisation below 30%. This isn't an arbitrary number. A high CUR, especially one above 50%, signals to lenders like banks and NBFCs that you might be overextended and facing financial stress. This makes you appear as a higher-risk borrower. Consequently, a high CUR can directly lower your CIBIL score. In the complex calculation of your score, your credit exposure—which includes your utilisation—is a significant factor. Maintaining a low ratio suggests you manage credit responsibly without depending on it too heavily.
The Sweet Spot: Lower is Always Better
While 30% is the widely-cited ceiling, it's a guideline, not a cliff. Exceeding it occasionally won't destroy your score overnight, especially if you pay the balance down quickly. However, for those aiming for an excellent CIBIL score (750 and above), the goal should be to keep utilisation even lower. Many individuals with the highest credit scores maintain a CUR in the single digits, often below 10%. A consistently low ratio is one of the strongest indicators of excellent credit health and discipline.
Practical Tips to Manage Your Utilisation
Keeping your CUR low doesn't mean you can't use your credit card. It’s about smart management. One effective strategy is to make multiple payments throughout the month instead of waiting for the bill. Since banks typically report your balance to CIBIL on the statement generation date, paying down your balance before this date can ensure a lower utilisation is reported. Another approach is to request a credit limit increase from your bank. A higher limit automatically lowers your CUR, assuming your spending stays the same. Spreading expenses across multiple cards can also prevent the utilisation on any single card from getting too high.
Handling Large Purchases and Common Pitfalls
What if you need to make a large purchase that will temporarily push your utilisation above 30%? If you plan to pay it off quickly, the impact on your score will be short-lived. Your score will typically recover within a month or two after the lower balance is reported. A common mistake that hurts utilisation is closing an old, unused credit card. While it might seem like a good way to simplify your finances, doing so reduces your total available credit, which can instantly increase your CUR and potentially lower your score. Unless the card has a high annual fee, it's often better to keep it open.
