Your CIBIL Score Explained
Your CIBIL score is a three-digit number, ranging from 300 to 900, that summarises your credit history and repayment behaviour. Lenders in India, from banks to financial institutions, rely on this score to assess your creditworthiness when you apply for
a loan or a new credit card. A score of 750 or higher is generally considered good and signals to lenders that you are a responsible borrower. One of the most significant factors that influences this score is your credit utilisation ratio, making it a critical metric for anyone looking to build or maintain a strong credit profile.
What Is Credit Utilisation Ratio?
The Credit Utilisation Ratio, or CUR, is the percentage of your total available credit that you are currently using. It applies specifically to revolving credit accounts like credit cards and lines of credit. Think of it as a measure of how dependent you are on borrowed funds for your day-to-day expenses. Lenders see a low CUR as a sign of financial stability and responsible credit management. Conversely, a high CUR can suggest that you are overextended and might face difficulties in repaying your debts, making you a riskier borrower.
The Magic Number: Why 30 Percent?
The 30% figure is a widely accepted rule of thumb in the financial world. Keeping your credit usage below this threshold is considered healthy and contributes positively to your CIBIL score. When your utilisation is low, it shows lenders that you are not reliant on credit to manage your finances. While 30% is a good upper limit, financial experts suggest that an even lower ratio, ideally in the single digits, is optimal for achieving the best possible credit scores. The key takeaway is simple: the lower your utilisation, the better it reflects on your financial discipline.
How to Calculate Your Utilisation 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 your total outstanding balance by your total credit limit and multiply the result by 100 to get your percentage. For example, if you have two cards—one with a ₹20,000 balance on a ₹50,000 limit, and another with a ₹10,000 balance on a ₹1,00,000 limit—your total balance is ₹30,000 and your total limit is ₹1,50,000. Your overall CUR would be (30,000 / 1,50,000) * 100, which equals 20%. It is important to look at both the overall ratio and the utilisation on individual cards, as maxing out even one card can negatively impact your score.
Practical Steps to Lower Your Ratio
If your credit utilisation is above 30%, don't worry. There are several effective ways to bring it down. The most direct method is to pay down your outstanding balances. Try to pay your bill in full each month, or at least pay more than the minimum amount due. You can also make multiple payments within a single billing cycle to keep the reported balance low. Another strategy is to request a credit limit increase from your card issuer. If approved, this immediately lowers your CUR, provided your spending doesn't increase along with the new limit. Spreading your expenses across multiple cards can also help you avoid high utilisation on any single card.
