What is Credit Utilisation?
Your Credit Utilisation Ratio, or CUR, is a simple percentage that shows how much of your available credit card limit you are using. For example, if you have one credit card with a limit of ₹1,00,000 and you have spent ₹25,000, your CUR is 25%. If you have multiple
cards, the calculation includes the total balance owed across all cards divided by the total credit limit of all your cards. This ratio is one of the most important factors that credit bureaus like CIBIL use to calculate your credit score.
Why the 30% Rule Matters
You will often hear that you should keep your credit utilisation below 30%. This isn't just random advice; it's a widely accepted guideline in the financial world. Lenders see a CUR below 30% as a sign of responsible credit management. It suggests that you are not overly dependent on credit to manage your finances. A high ratio, on the other hand, can be a red flag, indicating financial stress or a rising debt burden, which can negatively impact your CIBIL score. While it's not a strict cliff where your score suddenly plummets, lower utilisation is consistently better for your score. In fact, people with the highest credit scores often keep their utilisation below 10%.
Calculating Your Ratio
Calculating your overall CUR is straightforward. First, add up the outstanding balances on all your credit cards. Next, add up the total credit limits for all of those cards. Finally, divide the total balance by the total credit limit and multiply by 100 to get your percentage. For instance, if you have two cards—one with a ₹30,000 balance on a ₹1,00,000 limit, and another with a ₹10,000 balance on a ₹50,000 limit—your total balance is ₹40,000 and your total limit is ₹1,50,000. Your overall CUR would be approximately 26.7%. It is also important to note that a single maxed-out card can hurt your score, even if your overall utilisation is low.
Practical Tips to Lower Your Utilisation
If your CUR is creeping higher, there are several effective ways to bring it down. The most direct method is to pay down your balances. Instead of waiting for your statement, consider making payments more frequently, even multiple times a month, to keep your reported balance low. Another strategy is to request a credit limit increase from your bank. A higher limit automatically reduces your CUR, assuming your spending stays the same. You can also consider spreading your expenses across multiple cards to avoid a high utilisation on any single card. Finally, resist the urge to close old, unused credit cards. An older card adds to your total available credit, which helps keep your overall utilisation ratio down.
What If You Go Over 30%?
Exceeding the 30% mark, especially for a short period, is not a financial catastrophe. The great thing about the credit utilisation ratio is that it has no memory. Unlike late payments, which can stay on your report for years, a high CUR only affects your score as long as the high balance is reported. Once you pay down the balance and your card issuer reports the new, lower amount to the credit bureaus, your score can rebound relatively quickly, often within the next billing cycle or two. The key is to take action to reduce the balance rather than letting it linger month after month.
