Credit Utilisation Ratio: Meaning, Calculation & How To Improve

When it comes to finance, maintaining a low credit utilisation ratio (CUR) is crucial to achieving a healthy credit score. It is a vital number measuring the percentage of the available credit limit you use on average. When you apply for a loan, lenders calculate your CUR accurately to assess your financial health and determine your creditworthiness.

This article will explore what is credit utilisation, its importance, and how you can enhance it to improve your eligibility.

What is the Credit Utilisation Ratio?

Whenever you get a credit card, you get a credit limit, up to which you can shop using the card. However, the card providers do not expect you to consume the entire credit limit available to you. 

For instance, if you get a credit limit of Rs 1 Lakh, the card company does not want you to consume the entire Rs 1 Lakh. The percentage of the available credit limit you use is called your credit utilisation ratio. It is a crucial component that credit reporting agencies use to calculate your credit score. A higher CUR indicates credit-hungry behaviour that eventually reduces your credit rating.

How Does Credit Utilisation Work?

The credit utilisation ratio primarily focuses on your revolving credit. The calculation typically represents the total credit limit you utilise compared to the total revolving credit limit the credit issuer has approved for you. 

Your current CUR is a key metric affecting your credit score. It eventually affects your eligibility to obtain further credit. A high credit utilisation ratio indicates credit-hungry behaviour and your dependency on credit to handle financial obligations. Credit rating agencies also use this parameter to determine your credit score. Therefore, aim to keep your credit utilisation below 30% to maintain a high credit score and improve your eligibility to obtain credit like a Personal Loan online.

How to Calculate Credit Utilisation Ratio?

Want to know how to calculate credit utilisation? You must first tally up all your credit accounts. Add up all the outstanding balances and then the credit limits. Divide the total balances by the total credit limit, and multiply the result by 100 to calculate your credit utilisation ratio in percentage. 

Example of Credit Utilisation Ratio

Here is an example to calculate the credit utilisation ratio with two credit cards:

Use this formula to determine your credit utilisation ratio:

Credit utilisation ratio = (Total outstanding on all credit cards ÷ Total credit limit) × 100

For instance, if you have two credit cards with credit limits of Rs 50,000 and Rs 25,000, respectively, and your outstanding balances are Rs 20,000 and Rs 10,000, respectively, the calculation will be as follows:

Total outstanding balance: Rs. 20,000 + Rs. 10,000 = Rs. 30,000

Total credit limit: Rs. 50,000 + Rs. 25,000 = Rs. 75,000

Credit utilisation ratio: (Rs. 30,000 / Rs. 75,000) x 100 = 40% 

What is a Good Credit Utilisation Rate?

Different credit bureaus have unique cut-offs to determine an ideal credit utilisation ratio. However, a credit utilisation below 30% is an ideal figure. For instance, if your credit limit is Rs 1 Lakh, your utilisation should not exceed Rs 30,000 at any time.

How to Reduce Your Credit Utilisation Ratio?

Now that you know how is credit utilisation calculated and what the ideal CUR is, here are a few tips to reduce your credit utilisation and improve your loan eligibility:

• Keep Your Expenses Under Control: Even if you have a high credit limit, avoid using it to the fullest. Try to keep your expenses under control while remembering the 30-70 rule. When you utilise 30% of the credit limit on one card, try balancing it with other cards. Avoid using that card until you pay its bill or at least the minimum amount to keep your CUR below 30%. Follow this calculation each month on all cards to reduce your credit utilisation ratio.
• Repay the Credit Card Bills in Full: No matter how much credit limit you consume, ensure you pay the entire balance each month. Remember, clearing your credit card dues each month affects your credit utilisation ratio. Repaying the bill in full or making substantial payments each month will help keep your CUR within limits. Even if you cannot make the full payment, keep your outstanding balance low to achieve a low CUR.
• Avoid Using All Credit Cards: Keeping zero balance on some credit cards is another simple way to reduce your credit utilisation rate. When trying to reduce your CUR, avoid using a couple of cards for a few months. It is a simple trick to increase your available credit limit, eventually cutting down your CUR. However, you cannot achieve the goal if you continue overspending on other cards. Therefore, check your total credit limit and plan your expenditure within its 30%.
• Increase Your Credit Limit: If you maintain a good standing on a credit card account for over a few months, you can request an increase in your credit limit with the card issuer. An increased credit limit will help you reduce your CUR, provided you do not increase your expenditure as well.
• Apply for a New Credit Card: Obtaining a new credit card will automatically increase your total credit limit, eventually reducing your credit utilisation with the same expenditure. 

Conclusion

Knowing how to calculate credit utilisation helps manage your credit health. Reducing your CUR can boost your credit score and improve your chances of getting new loans from Hero FinCorp with favourable terms and conditions. 

A Personal Loan Calculator, a free-to-use tool on the Hero FinCorp website, can help you plan repayment with budget-friendly EMIs and boost your credit score. Remember, a healthy CUR demonstrates responsible credit behaviour and paves the way to a brighter financial future. 

Frequently Asked Questions

1. Is a 30% credit utilisation ratio better than a 50% ratio?

The lower your credit utilisation ratio, the better. Therefore, a 30% CUR is better than a 50% CUR.

2. What is the best credit card utilisation ratio?

Ideally, a credit utilisation ratio of up to 30% is the best CUR.

3. Is 50% credit card utilisation good?

A 50% credit card utilisation is good, but 30% is the ideal figure that most credit rating agencies expect.

4. What is the 30-rule rule for credit cards?

When you get a credit card, remember its limit and avoid using more than 30% of it. This is the 30% rule for credit cards.

5. Is it okay to use 40% of credit cards?

Occasionally, using 40% of a credit card limit is fine. However, 30% is the ideal number you should maintain on average.

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