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Your credit score or CIBIL score plays a crucial role in determining your financial health and creditworthiness. Among various factors that influence your credit score, the credit card utilisation rate holds significant importance. If you have little to no idea about credit card utilisation and want to gain more, read on!
In this blog post, we will explore the concept of credit card utilization, and its impact on your CIBIL score, and provide practical tips on how to keep your utilization rate below 30% to enhance your creditworthiness.
What is Credit Card Utilization?
Credit card utilization refers to the percentage of your available credit that you are currently using. It is calculated by dividing your credit card balances by your credit limits and multiplying the outcome by 100. For example, if you have a credit limit of Rs. 1,00,000 and your current balance is Rs. 50,000, your utilization rate would be 50% (1,00,000 ÷ 50,000) x 100. However, it is usually recommended to have an overall credit utilisation ratio below or equal to 30%.
The Impact on Your CIBIL Score
Your credit card utilization rate has a direct impact on your CIBIL score, which is a numeric representation of your creditworthiness. Maintaining a low utilization rate is essential for a healthy credit score. Here’s why:
- Demonstrates Responsible Credit Behaviour: Keeping your utilization rate below 30% shows that you are responsible with your credit usage and are not overtly reliant on credit. Lenders view this as a positive indicator of financial discipline. It is most essential for students and especially those using credit card for students.
- Indicates Available Credit: A lower utilization rate indicates that you have more available credit at your disposal. This implies that you are not maxing out your cards and have enough credit cushion to handle unforeseen expenses.
- Minimizes Risk Perception: A high utilization rate suggests that you are using a significant portion of your available credit, which may raise concerns among lenders. It can be seen as a potential risk, as it indicates a higher likelihood of default or difficulty in managing debt.
Tips to Keep Your Utilization Rate Below 30%
- Regularly Monitor Your Balances: Keep a close eye on your credit card balances to ensure they remain within a manageable range. Regularly reviewing your statements or using mobile apps provided by credit card issuers can help you stay informed about your usage.
- Increase Your Credit Limit: Requesting a credit limit increase on your existing credit cards can help lower your utilization rate. However, it is important to note that this strategy only works if you maintain responsible spending habits and avoid accruing more debt.
- Make Frequent Payments: Instead of waiting for your monthly statement, consider making multiple payments throughout the billing cycle. This can help keep your balances low and maintain a healthy utilization rate.
- Pay Off Existing Debt: Reducing your outstanding credit card debt will naturally lower your utilization rate. Focus on paying off high-interest debts first and create a repayment plan to gradually eliminate your balances.
Moreover, you should also use the correct credit card that offers you amazing benefits on the way and help you save eventually like the Airtel Axis Credit Card.
