When applying for a personal loan, home loan, or credit line, lenders carefully evaluate your creditworthiness before approving the loan. One key factor that significantly impacts your loan approval and interest rates is your credit card utilization ratio.
Many borrowers focus on maintaining a high credit score, but they overlook how credit utilization ratio (CUR) influences their credit profile and loan eligibility. A high CUR can raise red flags for lenders, even if you make timely payments.
In this blog, we’ll explore what the credit utilization ratio is, how it affects your loan applications, and expert strategies to keep it within an ideal range for better loan approval chances.
What is Credit Card Utilization Ratio?
Your credit card utilization ratio is the percentage of your available credit limit that you are currently using. It is calculated using the formula:
Credit Utilization Ratio = (Total Credit Card Balance/Total Credit Limit)×100
For example, if you have a total credit limit of ₹1,00,000 and your current outstanding balance is ₹40,000, your CUR is:
(40,000/1,00,000)×100=40%
Ideal Credit Utilization Ratio for Loan Approvals
| Credit Utilization Ratio | Impact on Credit Score & Loan Eligibility |
| Below 30% | Best for loan approval, shows responsible credit usage |
| 30% – 50% | Acceptable but may indicate moderate credit dependency |
| Above 50% | High risk, may reduce credit score and loan eligibility |
| Above 70% | Very risky, indicates overdependence on credit, may lead to loan rejection |
RupeeQ Tip – Lenders prefer borrowers with a credit utilization ratio below 30%. If your utilization is higher, consider reducing outstanding balances before applying for a loan to improve your chances of approval.
How Credit Utilization Ratio Affects Loan Approval
Impacts Your Credit Score
The credit utilization ratio accounts for nearly 30% of your credit score, making it one of the most influential factors. A high CUR can lower your credit score, reducing your chances of getting a loan with a favorable interest rate.
Example
Neha had a credit score of 750 with a 20% utilization ratio. After increasing her credit card usage to 60%, her credit score dropped to 690 in just a few months.
Key takeaway – Keeping your CUR below 30% helps maintain a high credit score, improving loan eligibility.
Indicates Credit Management Habits to Lenders
Lenders use CUR to assess your financial discipline and repayment capacity. A low CUR suggests that you are managing credit responsibly, while a high CUR may indicate financial stress or dependency on borrowed funds.
Example
Amit applied for a ₹10 Lakh personal loan. His credit score was 720, but his CUR was 65%. The lender considered him a high-risk borrower and either reduced the approved loan amount or increased the interest rate.
Affects Your Loan Interest Rate
Even if your loan is approved, a high credit utilization ratio may lead to higher interest rates. Lenders charge higher interest to borrowers who appear financially overextended.
Example
Rohit and Sanya both applied for a personal loan of ₹5 Lakhs.
| Applicant | Credit Utilization Ratio | Credit Score | Interest Rate Offered |
| Rohit | 25% | 760 | 10.50% |
| Sanya | 55% | 700 | 14.00% |
Despite having a decent credit score, Sanya was offered a higher interest rate due to her high CUR.
Determines Your Debt-to-Income Ratio (DTI)
Lenders also consider your Debt-to-Income Ratio (DTI), which includes all outstanding debts, including credit card balances. A high CUR increases your DTI, making it harder to qualify for loans.
Example
Sameer had a monthly income of ₹80,000 and was using ₹50,000 worth of credit card limits monthly. His DTI was above 60%, which led to loan rejection despite having a 700+ credit score.
RupeeQ Tip – Before applying for a loan, pay off a portion of your credit card balance to lower your CUR. Even a 10% reduction in utilization can significantly boost your loan approval chances.
How to Maintain an Ideal Credit Utilization Ratio for Loan Approvals
Keep Your Utilization Below 30%
Try to use only 30% or less of your available credit limit. If you have multiple credit cards, spread out expenses across different cards to avoid over-utilization on a single card.
Pay Credit Card Bills in Full and On Time
Avoid carrying high balances month-to-month, as this increases your CUR and affects your credit score. Make full payments instead of just minimum dues to lower your utilization.
Request a Higher Credit Limit
If your expenses are high, requesting a credit limit increase can help lower your utilization ratio without reducing spending.
Example
Megha had a credit limit of ₹1 Lakh and regularly used ₹40,000 per month (40% CUR). She requested a limit increase to ₹2 Lakhs, reducing her CUR to 20% without changing her spending habits.
Make Multiple Payments in a Month
Instead of waiting for the due date, making two or more payments within a billing cycle keeps the outstanding balance low, ensuring a lower utilization ratio is reported to credit bureaus.
Avoid Closing Old Credit Cards
Closing older credit cards reduces your total available credit, which can increase your CUR even if your spending remains the same.
Example
Rahul had two credit cards with a total limit of ₹5 Lakhs. He closed one card with a ₹2 Lakh limit, which increased his CUR from 25% to 40%, causing a credit score drop.
Use a Personal Loan to Consolidate High Credit Card Debt
If your credit card balances are high, consider a personal loan to consolidate and pay off debts. This reduces your credit utilization ratio and interest burden.
Example
Shweta had ₹3 Lakhs in credit card debt at 36% interest. She took a personal loan at 12% interest, repaid her credit card balances, and reduced her CUR to below 10%.
RupeeQ Tip – If you need to consolidate credit card debt, check RupeeQ personal loan options to find lower interest rates and improve your loan eligibility.
Final Thoughts on Keeping Credit Utilization Ratio in Check for Better Loan Approval
Your credit utilization ratio is a critical factor that affects loan approvals, interest rates, and overall creditworthiness. To improve your chances of securing a loan at low-interest rates, always:
- Keep your credit utilization ratio below 30%.
- Pay off credit card balances before applying for a loan.
- Avoid maxing out your credit cards.
- Consider a credit limit increase or a personal loan for debt consolidation.
By managing your credit utilization effectively, you can boost your credit score, secure better loan terms, and reduce financial stress.
