Ever wondered how your credit utilisation ratio can affect your financial profile? Read this article to learn all about it and more.
In the world of Credit Cards, credit limit and credit utilisation ratio are two terms that are commonly used. Heard of them, right? The big question, however, is why do these two terms matter to Credit Card users?
Well, if you’ve been wondering about this, then we’ve got the answers for you. Keep reading!
Let’s start with understanding both the terms, shall we?
Every Credit Card comes with a credit limit. This limit is basically the maximum amount you are eligible to borrow from your credit lender for making your purchases. The limit is usually set by the lender after considering certain aspects of your profile such as your income and your Credit Score.
Credit Utilisation Ratio
Credit utilisation ratio is the total amount that you’ve borrowed/owe your lender against your total credit limit.
Additional Reading: Understanding The Mechanics of Your Credit Score
The Role Of Credit Utilisation Ratio
Although it may not seem like a big deal, your credit utilisation ratio plays a vital role in framing your financial profile. Ideally, you are supposed to stick to around a 30% to 40% utilisation ratio. Now you may be thinking why is this necessary because you’re after all entitled to your entire credit limit.
Well, of course, you are entitled to it. However, using up your entire limit, even if you’re capable of paying your outstanding without fail, portrays you as a credit-hungry individual.
Lenders aren’t fans of credit-hungry individuals and this may hamper your future chances of getting another Credit Card or a loan easily.
Apart from being frowned upon by lenders, a high credit utilisation ratio can also affect your Credit Score negatively. Utilisation ratio is one of the key detriments of your Credit Score. So, if you don’t keep a check on it, then you can bid bye-bye to your awesome Credit Score. Don’t know your score yet? Check your score for FREE and in just three minutes.
Additional Reading: 3 Things You Should Know About Your Credit Score
Calculating Your Utilisation Ratio
You don’t have to be a math geek to calculate your utilisation ratio. It’s rather simple. All you have to do is divide the outstanding on your Credit Card by your total credit limit. For instance, let’s assume that you’ve utilised or spent Rs. 60,000 and your total limit is Rs. 1,50,000. Your credit utilisation ratio in this case is 40% (pretty acceptable!).
Now let’s assume your outstanding is Rs. 1,00,000. In this case, your utilisation ratio is almost 67%, which is quite high. You’ll need to work towards lowering your utilisation ratio.
4 Simple Ways To Maintain A Low Utilisation Ratio
Whether you’ve got yourself a high utilisation ratio and want to get it on track or you just want tips to maintain a low utilisation ratio, here are four simple tricks:
Budget Your Spends
Drawing a budget is the first step when it comes to financial planning. Check your previous Credit Card statements and figure out where you’ve been spending. Once you know where your money has been going, it will be easy for you to knock off expenses that have been leading to a high Credit Card bill and, hence, high utilisation ratio.
In addition, checking your previous statements will also give you insight on how you’ve been using your Credit Card. In case you’ve been using it a little too much, maybe it’s time you split your purchases between your Credit Card and Debit Card.
Draw up a budget by cutting out unnecessary expenses and splitting purchases between your Credit and Debit Cards. Stick to this and you can easily keep your Credit Card utilisation between 30% and 40%.
Request For A Credit Limit Increase
You may have got hold of a Credit Card when you were earning lesser than you are now or probably when you were still a student. Based on your profile at that time, your card lender would have assigned your credit limit. However, your current profile may make you eligible for a higher credit limit than your existing one.
Get in touch with your Credit Card provider and request them to increase your credit limit. If you’ve had a good track record, then your lender would be more than happy to oblige. Just make sure that you don’t increase your spending as your limit increases.
Additional Reading: Why You Should Ask For A Higher Credit Card Limit
Get Another Credit Card
Getting a second Credit Card can help increase your total credit limit and keep your total utilisation ratio in check. For instance, if your current card’s limit is Rs. 1,50,000 and you get another card which offers you a limit of Rs. 1,00,000. Now your total limit is Rs. 2,50,000, which means your purchasing power has increased to Rs. 1,00,000 from Rs. 60,000. And your credit utilisation ratio will still be 40%.
Don’t Close Credit Cards
So, you have two Credit Cards and you only really use one of them. Of late, you’ve been thinking of closing the unused Credit Card. Bad idea! Even though you don’t use it, we’d recommend that you keep the card with you since the limit of the card will be added to your total available credit limit, thereby giving you an increased credit limit. And this, in turn, will help you keep your utilisation ratio within the favourable limit.
Additional Reading: What Can Hurt Your Credit Score?
In the end, it all boils down to responsible Credit Card behavior. Don’t have a Credit Card? Apply for one and get approval in just 24 hours. And you don’t have to submit any physical documents.