Credit utilization is a key factor that significantly impacts your credit score and financial health. It represents the percentage of your available credit limit that you are currently using. Managing credit utilization effectively can improve your credit score and increase your chances of securing loans and financial products at favorable terms.
In this blog, we’ll explore what credit utilization is, why it matters, and how to manage it effectively to boost your creditworthiness.
What is Credit Utilization?
Credit utilization is the ratio of your total credit card balance to your total credit limit, expressed as a percentage.
Formula to Calculate Credit Utilization:
Credit Utilization=(Total Credit Used/Total Credit Limit)×100
Example:
If you have a total credit limit of ₹1,00,000 and your current outstanding balance is ₹30,000, your credit utilization ratio is:
(30,000÷1,00,000)×100=30%
RupeeQ Tip: Keep your credit utilization below 30% of your available credit limit for a healthy credit score.
Why Credit Utilization Matters in Your Credit Score
Credit utilization accounts for around 30% of your overall credit score, making it one of the most significant factors considered by credit bureaus like CIBIL, CRIF Highmark, Experian, and Equifax. A lower credit utilization ratio indicates responsible credit management, while a high ratio may signal financial strain.
Impact of High Credit Utilization:
- Lower Credit Score: Using a large percentage of your credit limit can reduce your credit score significantly.
- Higher Interest Rates: Lenders may offer higher interest rates, assuming you are a risky borrower.
- Limited Access to New Credit: High utilization makes it harder to qualify for new loans or credit cards.
Example:
Vikram had a credit utilization of 80%, which lowered his score by 100 points. After reducing it to 25%, his score improved within three months.
RupeeQ Tip: Paying off credit card bills frequently can help keep your utilization ratio in check.
Ideal Credit Utilization Ratio
Financial experts and lenders recommend maintaining a credit utilization ratio below 30%. Keeping your utilization in the ideal range indicates a well-managed financial profile.
Credit Utilization Ranges and Their Impact:
| Credit Utilization Ratio | Impact on Credit Score |
| Below 10% | Excellent – High creditworthiness |
| 10% – 30% | Good – Healthy credit usage |
| 30% – 50% | Fair – Manageable, but risky |
| Above 50% | Poor – May lower credit score |
RupeeQ Tip: If your utilization is high, consider increasing your credit limit to lower the ratio effectively.
How to Manage and Reduce Credit Utilization
If you’re struggling with high credit utilization, follow these simple strategies to manage and reduce it:
Pay Off Balances Frequently
Instead of waiting for the due date, make multiple payments within the billing cycle to lower the reported balance.
Example:
Riya pays her outstanding credit card balance every two weeks to keep her utilization ratio below 30%.
Increase Your Credit Limit
Request a credit limit increase from your bank to lower your utilization percentage without changing your spending habits.
Example:
Ajay’s total credit limit was ₹50,000, with a balance of ₹20,000 (40% utilization). After requesting a credit limit increase to ₹1,00,000, his utilization dropped to 20%.
Use Multiple Credit Cards Wisely
Distribute your expenses across multiple cards to avoid maxing out any single credit line.
Example:
Instead of using one card for all expenses, Neha divides her spending across three cards to maintain a lower utilization ratio.
Set Up Balance Alerts
Many credit card providers offer balance alerts that notify you when your utilization is approaching a certain percentage.
Example:
Karan set an alert at 25% utilization to avoid exceeding the recommended threshold.
Avoid Unnecessary Expenses
Limit discretionary spending on your credit card and prioritize essential purchases to maintain a healthy ratio.
Common Mistakes to Avoid When Managing Credit Utilization
Even with the best intentions, borrowers often make mistakes that can negatively affect their credit utilization ratio. Here are some common pitfalls to avoid:
Maxing Out Your Credit Card:
Using your entire credit limit can indicate financial distress and hurt your credit score.
Ignoring Credit Limits on Supplementary Cards:
Many people overlook the combined utilization of their primary and supplementary cards.
Not Paying Minimum Due Amount:
Missing even the minimum due can impact your credit history and increase your utilization.
Closing Old Credit Accounts:
Closing old cards reduces your total credit limit, leading to a higher utilization ratio.
How Often Should You Check Your Credit Utilization?
It is recommended to review your credit utilization at least once in 6 months to ensure it remains under control. Monitoring it regularly helps you plan finances better and avoid last-minute surprises when applying for loans.
Conclusion
Your credit utilization plays a crucial role in maintaining a healthy credit score and financial reputation. Keeping your utilization below 30%, making timely payments, and avoiding unnecessary spending can significantly improve your credit profile.
By proactively managing your credit utilization, you can improve your chances of loan approvals, better interest rates, and overall financial stability.
